Prospectus
15,000,000 Shares of Beneficial Interest
Pilgrim America Prime Rate Trust
New York Stock Exchange Symbol: PPR
Pilgrim America
Funds
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004
(800) 992-0180
Pilgrim America Prime Rate Trust (the "Trust") is a diversified, closed-end
management investment company. The Trust's investment objective is to seek as
high a level of current income as is consistent with the preservation of
capital. The Trust seeks to achieve its objective by investing primarily in
interests in senior floating-rate loans ("Senior Loans"), the interest rates of
which float periodically based upon a benchmark indicator of prevailing
interest rates. Shares of the Trust trade on the New York Stock Exchange (the
"NYSE") under the symbol "PPR." The Trust's Investment Manager is Pilgrim
America Investments, Inc. ("PAII" or the "Investment Manager"). The address of
the Trust is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004.
Investment in the Trust involves certain risks and special considerations,
including risks associated with the Trust's use of leverage. See "Risk Factors
and Special Considerations" beginning on page 17.
This Prospectus applies to 15,000,000 shares of beneficial interest ("Shares")
of the Trust which may be issued and sold by the Trust pursuant to the Trust's
Shareholder Investment Program (the "Program") or pursuant to privately
negotiated transactions. See "Plan of Distribution." The Program allows
participating shareholders to reinvest all dividends and capital gain
distributions in additional Shares of the Trust and allows participants to make
additional optional cash investments in amounts from a minimum of $100 to a
maximum of $5,000 per month. Investments in excess of $5,000 per month can only
be made if a waiver is granted by the Trust. Shares may be issued under the
Program only when the Trust's shares are trading at a premium to net asset
value ("NAV"). When Shares are issued by the Trust under the Program in
connection with the reinvestment of dividends and distributions, they will be
issued at the greater of (i) the NAV per Share of the Trust's Shares or (ii)
95% of the average daily market price (the volume-weighted average sales price,
per Share, as reported on the New York Stock Exchange Composite Transaction
Tape as shown daily on Bloomberg's AQR screen) of the Trust's Shares over a two
trading day pricing period. When Shares are issued by the Trust under the
Program in connection with optional cash investments, they will be issued at
the greater of (i) the NAV per Share of the Trust's Shares or (ii) a discount
(ranging from 0% to 5%) to the average daily market price for a five trading
day pricing period. The discount applicable to optional cash investments for
amounts less than $5,000 per month may differ from the discount applicable to
optional cash investments in excess of $5,000 per month.
The Shares may also be offered pursuant to privately negotiated transactions
between the Trust and specific investors. Shares issued by the Trust in
connection with privately negotiated transactions will be issued at the greater
of (i) the NAV per Share of the Trust's Shares or (ii) a discount ranging from
0% to 5% of the market price of the Trust's Shares at the close of business on
the two business days preceding the date upon which Shares are sold pursuant to
the privately negotiated transaction. The discount to apply to such privately
negotiated transactions will be determined by the Trust with regard to each
specific transaction.
In connection with certain investments in excess of $5,000 pursuant to a
waiver, a commission of up to 1.00% of the amount of such investment may be
paid to Pilgrim America Securities, Inc. ("PASI"), while in connection with
certain privately negotiated transactions, a commission of up to 3.00% of the
amount of such investment may be paid to PASI. PASI may allow all or part of
such commission to other broker-dealers. In any event, the net proceeds
received by the Trust in connection with the sale may not be less than the
greater of (i) the NAV per share or (ii) 94% of the average daily market price
over the relevant pricing period. See "Distribution Arrangements."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Investors are advised to read this Prospectus and retain it for future
reference. This Prospectus sets forth concisely the information about the Trust
that a prospective investor ought to know before investing. A Statement of
Additional Information dated May 18, 1998 (the "SAI") containing additional
information about the Trust has been filed with the Securities and Exchange
Commission (the "Commission") and is incorporated by reference in its entirety
into this Prospectus. A copy of the SAI, the table of contents of which appears
on page 28 of this Prospectus, may be obtained without charge by contacting the
Trust toll-free at (800) 992-0180.
The date of this Prospectus is June 11, 1998.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus.
THE TRUST AT A GLANCE
<TABLE>
<S> <C>
- --------------------------------------------- ----------------------------------------------------------
The Trust The Trust is a diversified, closed-end management
investment company organized as a Massachusetts business
trust. As of May 12, 1998, the Trust's NAV per Share was
$9.31.
- --------------------------------------------- ----------------------------------------------------------
NYSE Listed As of May 12, 1998, the Trust had 111,017,618 Shares
outstanding, which are traded on the NYSE under the symbol
"PPR." As of May 12, 1998, the last reported sales price
of a Share of the Trust was $ 10.125.
- --------------------------------------------- ----------------------------------------------------------
Investment Objective To obtain as high a level of current income as is
consistent with the preservation of capital. There can be
no assurance that the Trust will achieve its investment
objective.
- --------------------------------------------- ----------------------------------------------------------
Primary Investment Strategy The Trust seeks to achieve its investment objective by
primarily acquiring interests in Senior Loans with
interest rates that float periodically based on a
benchmark indicator of prevailing interest rates, such as
the Prime Rate or the London Inter-Bank Offered Rate
("LIBOR"). The Trust may also employ techniques such as
borrowing for investment purposes.
- --------------------------------------------- ----------------------------------------------------------
Diversification The Trust maintains a diversified investment portfolio. As
a diversified management investment company, the Trust,
with respect to 75% of its total assets, may invest no
more than 5% of the value of its total assets in any one
issuer (other than the U.S. Government). This strategy of
diversification is intended to manage risk by limiting
exposure to any one issuer.
- --------------------------------------------- ----------------------------------------------------------
General Investment Guidelines * Under normal circumstances, at least 80% of the
Trust's net assets is invested in Senior Loans.
* A maximum of 25% of the Trust's assets is invested in
any one industry.
* The Trust only invests in Senior Loans of U.S.
corporations, partnerships, limited liability
companies, or other business entities organized under
U.S. law or domiciled in Canada or U.S. territories
and possessions. The Senior Loans must be denominated
in U.S. dollars.
- --------------------------------------------- ----------------------------------------------------------
Distributions Income dividends are declared and paid monthly. Income
dividends may be distributed in cash or reinvested in
additional full and fractional shares through the Trust's
Shareholder Investment Program.
- --------------------------------------------- ----------------------------------------------------------
Investment Manager Pilgrim America Investments, Inc.
- --------------------------------------------- ----------------------------------------------------------
Administrator Pilgrim America Group, Inc.
- --------------------------------------------- ----------------------------------------------------------
</TABLE>
1
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS AT A GLANCE
This Prospectus contains certain statements that may be deemed to be
"forward-looking statements." Actual results could differ materially from those
projected in the forward-looking statements as a result of uncertainties set
forth below and elsewhere in the Prospectus. For additional information, see
"Risk Factors and Special Considerations."
<TABLE>
<S> <C>
- --------------------------------------------- ----------------------------------------------------------
Discount from or Premium to NAV * Shares will be issued under the Program only when the
market price of the Shares, plus the estimated
commissions of purchasing Shares on the secondary
market, is greater than NAV.
* As with any security, the market value of the Shares
may increase or decrease from the amount that you
paid for the Shares.
* The Trust's Shares may trade at a discount to NAV.
This is a risk separate and distinct from the risk
that the Trust's NAV per Share may decrease.
- --------------------------------------------- ----------------------------------------------------------
Credit Risk Investment in the Trust involves the risk that bor- rowers
under Senior Loans may default on obli- gations to pay
principal or interest when due, that lenders may have
difficulty liquidating the collat- eral securing the
Senior Loans or enforcing their rights under the terms of
the Senior Loans, and that the Trust's investment
objective may not be realized.
- --------------------------------------------- ----------------------------------------------------------
Leverage The Trust may borrow for investment purposes, which
increases both investment opportunity and risk.
- --------------------------------------------- ----------------------------------------------------------
Secondary Market for the Trust's Shares The issuance of the Shares through the Program may have an
adverse effect on prices in the sec- ondary market for the
Trust's Shares by increasing the number of Shares
available for sale. In addi- tion, the Shares may be
issued at a discount to the market price for such Shares,
which may put downward pressure on the market price for
Shares of the Trust.
- --------------------------------------------- ----------------------------------------------------------
Limited Secondary Market for Senior Loans Because of a limited secondary market for Senior Loans,
the Trust may be limited in its ability to sell portfolio
holdings at carrying value to generate gains or avoid
losses.
- --------------------------------------------- ----------------------------------------------------------
Demand for Senior Loans An increase in demand for Senior Loans may ad- versely
affect the rate of interest payable on Senior Loans
acquired by the Trust.
- --------------------------------------------- ----------------------------------------------------------
</TABLE>
2
<PAGE>
TRUST EXPENSES
The following table is intended to assist the Trust's shareholders (the
"Shareholders") in understanding the various costs and expenses associated with
investing in the Trust.(1)
<TABLE>
<CAPTION>
Net Assets Net Assets
Plus Without
Borrowings(2) Borrowings(3)
--------------- --------------
<S> <C> <C>
Shareholder Transaction Expenses
Shareholder Investment Program
Commission (as a percentage of offering price)(4) ......... 1.00% 1.00%
Shareholder Investment Program Fees ....................... NONE NONE
Privately Negotiated Transactions
Commission (as a percentage of offering price)(4) ......... 3.00% 3.00%
Shareholder Investment Program Fees ....................... NONE NONE
Annual Expenses (as a percentage of net assets
attributable to Shares)
Management and Administrative Fees(5) ..................... 1.26% 0.91%
Other Operating Expenses(6) ............................... 0.25% 0.22%
---------- ----------
Total Annual Expenses before Interest ........................ 1.51% 1.13%
Interest Expense on Borrowed Funds ........................... 3.07% 0.00%
---------- ----------
Total Annual Expenses ........................................ 4.58% 1.13%
========== ==========
</TABLE>
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(1) The calculations in the fee table above are based on the Trust's expenses
as a percentage of net assets. Certain expenses of the Trust, such as
management and administrative fees, are calculated on the basis of net
assets plus borrowings. If the Trust's expenses are calculated on the basis
of net assets plus borrowings (including borrowings equal to 331|M/3% of
net assets plus borrowings), the annual expenses in the fee table would
read as follows:
<TABLE>
<S> <C>
Annual Expenses (as a percentage of net assets plus borrowings attributable to Shares)
Management and Administrative Fees ................................................ 0.84%
Other Operating Expenses .......................................................... 0.16%
----
Total Annual Expenses before Interest Expense ..................................... 1.00%
Interest Expense on Borrowed Funds ................................................ 2.05%
----
Total Annual Expenses ............................................................. 3.05%
====
</TABLE>
Borrowing may be made for the purpose of acquiring additional
income-producing investments when the Investment Manager believes that such
use of borrowed proceeds will enhance the Trust's net yield.
(2) Expenses are calculated based upon the Trust's net assets plus outstanding
borrowings (at 331|M/3% of net assets plus borrowings) and are shown as a
percentage of net assets.
(3) Expense ratios are calculated based upon net assets of the Trust and assume
that no borrowings have been made.
(4) In connection with optional cash investments in excess of $5,000 pursuant
to a waiver, a commission of up to 1.00% of the amount of such investment
may be paid to PASI for services in connection with the sale of the Shares,
while in connection with certain privately negotiated transactions, a
commission of up to 3.00% of such investment may be paid to PASI. PASI may
allow all or some of such commission to other broker-dealers. See
"Distribution Arrangements." No commissions will be paid by the Trust or
its Shareholders in connection with the reinvestment of dividends and
capital gains distributions or in connection with optional cash investments
up to the maximum of $5,000 per month.
(5) Pursuant to an investment management agreement with the Trust, PAII is
entitled to receive a fee of 0.85% of the average daily net assets of the
Trust, plus the proceeds of any outstanding borrowings, up to $700 million;
0.75% of the average daily net assets, plus the proceeds of any outstanding
borrowings, in excess of $700 million up to $800 million; and 0.65% of the
average daily net assets, plus the
3
<PAGE>
proceeds of any outstanding borrowings, in excess of $800 million. PAII has
agreed to reduce its management fee until November 12, 1999 to 0.60% on
that portion of the Trust's average daily net assets, plus the proceeds of
any outstanding borrowings, in excess of $1.15 billion. See "Investment
Management and Other Services -- Investment Manager." On May 2, 1998, the
Board of Trustees approved an amendment to the Trust's investment
management agreement with PAII that changes the investment management fee
to a rate of 0.80% of the average daily net assets of the Trust, plus the
proceeds of any outstanding borrowings. The amendment will not be effective
until approved by a majority of the shareholders of the Trust. The
amendment will be submitted to shareholders for their approval at the
Trust's annual shareholders meeting currrently scheduled for August, 1998.
Pursuant to its Administration Agreement with the Trust, Pilgrim America
Group, Inc. ("PAGI" or the "Administrator"), the Trust's Administrator, is
entitled to receive a fee of 0.15% of the Trust's average daily net assets,
plus the proceeds of any outstanding borrowings, up to $800 million; and
0.10% of the average daily net assets, plus the proceeds of any outstanding
borrowings, in excess of $800 million. See "Investment Management and Other
Services -- The Administrator."
(6) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
The following example applies to shares issued in connection with the
Trust's Shareholder Investment Program, which may have a maximum front-end
commission of 1.0% on sales of greater than $5,000 per month pursuant to a
request for waiver:
<TABLE>
<CAPTION>
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Example 1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where
the Trust has borrowed .......................... $55 $147 $239 $473
- ---------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where
the Trust has not borrowed ...................... $21 $ 46 $ 72 $146
- ---------------------------------------------------------------------------------------------------
</TABLE>
The following example applies to shares issued in connection with
privately negotiated transactions, which may have a maximum front-end
commission of 3.0%:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Example 1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where
the Trust has borrowed .......................... $75 $164 $254 $484
- ---------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where
the Trust has not borrowed ...................... $41 $ 65 $ 90 $163
- ---------------------------------------------------------------------------------------------------
</TABLE>
These hypothetical examples assume that all dividends and other distributions
are reinvested at NAV and that the percentage amounts listed under Annual
Expenses above remain the same in the years shown. The above tables and the
assumption in the hypothetical example of a 5% annual return are required by
regulation of the Commission applicable to all investment companies; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Trust's Shares. For more complete
descriptions of certain of the Trust's costs and expenses, see "Investment
Management and Other Services."
The foregoing examples should not be considered a representation of past or
future expenses, and actual expenses may be greater or less than those shown.
4
<PAGE>
FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE
Financial Highlights Table
The table below sets forth selected financial information which has been
derived from the financial statements in the Trust's Annual Report dated as of
February 28, 1998. For the fiscal years ended February 28, 1998 and 1997, and
February 29, 1996, the information in the table below has been audited by KPMG
Peat Marwick LLP, independent certified public accountants. For all periods
ending prior to February 29, 1996, the financial information was audited by the
Trust's former auditors. This information should be read in conjunction with
the Financial Statements and Notes thereto included in the Trust's February 28,
1998 Annual Report to Shareholders, which contains further information about
the Trust's performance, and which is available to Shareholders upon request
and without charge.
<TABLE>
<CAPTION>
Year Ended February 28 or February 29,
------------------------------------------------------------------------------
1998 1997(8) 1996(6) 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
NAV, beginning of period .......................... $ 9.45 $ 9.61 $ 9.66 $ 10.02 $ 10.05 $ 9.96
---------- ---------- ---------- ---------- ---------- ----------
Net investment income ............................. 0.87 0.82 0.89 0.74 0.60 0.60
Net realized and unrealized gain (loss)
on investment .................................... ( 0.13) ( 0.02) ( 0.08) 0.07 ( 0.05) 0.01
---------- ---------- ---------- ---------- ---------- ----------
Increase in NAV from investment operations ........ 0.74 0.80 0.81 0.81 0.55 0.61
Distributions from net investment income .......... ( 0.85) ( 0.82) ( 0.86) ( 0.73) ( 0.60) ( 0.57)
Reduction in NAV from rights offering. ............ -- ( 0.14) -- ( 0.44) -- --
Increase in NAV from repurchase of
capital stock .................................... -- -- -- -- 0.02 0.05
---------- ---------- ---------- ---------- ---------- ----------
NAV, end of period ................................ $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02 $ 10.05
========== ========== ========== ========== ========== ==========
Closing market price at end of period ............. $ 10.31 $ 10.00 $ 9.50 $ 8.75 $ 9.25 $ 9.13
========== ========== ========== ========== ========== ==========
Total Return
Total investment return at closing
market price(3) .................................. 12.70% 15.04%(5) 19.19% 3.27%(5) 8.06% 10.89%
Total investment return based on NAV(4) ........... 8.01% 8.06%(5) 9.21% 5.24%(5) 6.28% 7.29%
Ratios/ Supplemental Data
Net assets, end of period (000's) ................. $1,034,403 $1,031,089 $ 862,938 $ 867,083 $ 719,979 $ 738,810
Average Borrowings (000's) ........................ $ 346,110 $ 131,773 -- -- -- --
Ratios to average net assets plus borrowings:
Expenses (before interest and other fees
related to revolving credit facility) ........... 1.04% 1.13% -- -- -- --
Expenses. ........................................ 2.65% 1.92% -- -- -- --
Net investment income ............................ 6.91% 7.59% -- -- -- --
Ratios to average net assets:
Expenses (before interest and other fees
related to revolving credit facility) ........... 1.39% 1.29% -- -- -- --
Expenses ......................................... 3.54% 2.20% 1.23% 1.30% 1.31% 1.42%
Net investment income ............................ 9.23% 8.67% 9.23% 7.59% 6.04% 5.88%
Portfolio turnover rate ........................... 90% 82% 88% 108% 87% 81%
Shares outstanding at end of period (000's) ....... 110,764 109,140 89,794 89,794 71,835 73,544
Average daily balance of debt outstanding
during the period (000's) (7) .................... $ 346,110 $ 131,773 $ -- $ 2,811 $ -- $ 636
Average monthly shares outstanding during
the period (000's) ............................... 109,998 95,917 89,794 74,598 -- 79,394
Average amount of debt per share during
the period(7) .................................... $ 3.15 $ 1.37 $ -- $ 0.04 $ -- $ 0.01
<CAPTION>
May 12,
1988* to
February
1992 1991 1990 28, 1989
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Per Share Operating Performance
NAV, beginning of period .......................... $ 9.97 $ 10.00 $ 10.00 $ 10.00
---------- ---------- ---------- ----------
Net investment income ............................. 0.76 0.98 1.06 0.72
Net realized and unrealized gain (loss)
on investment .................................... ( 0.02) ( 0.05) -- --
---------- ---------- ---------- ----------
Increase in NAV from investment operations ........ 0.74 0.93 1.06 0.72
Distributions from net investment income .......... ( 0.75) ( 0.96) ( 1.06) ( 0.72)
Reduction in NAV from rights offering. ............ -- -- -- --
Increase in NAV from repurchase of
capital stock .................................... -- -- -- --
---------- ---------- ---------- ----------
NAV, end of period ................................ $ 9.96 $ 9.97 $ 10.00 $ 10.00
========== ========== ========== ==========
Closing market price at end of period ............. $ -- $ -- $ -- $ --
========== ========== ========== ==========
Total Return
Total investment return at closing
market price(3) .................................. -- -- -- --
Total investment return based on NAV(4) ........... 7.71% 9.74% 11.13% 7.35%
Ratios/ Supplemental Data
Net assets, end of period (000's) ................. $ 874,104 $1,158,224 $1,036,470 $ 252,998
Average Borrowings (000's) ........................ -- -- -- --
Ratios to average net assets plus borrowings:
Expenses (before interest and other fees
related to revolving credit facility) ........... -- -- -- --
Expenses. ........................................ -- -- -- --
Net investment income ............................ -- -- -- --
Ratios to average net assets:
Expenses (before interest and other fees
related to revolving credit facility) ........... -- -- -- --
Expenses ......................................... 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income ............................ 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate ........................... 53% 55% 100% 49%(1)
Shares outstanding at end of period (000's) ....... 87,782 116,022 103,660 25,294
Average daily balance of debt outstanding
during the period (000's) (7) .................... $ 8,011 $ 2,241 $ -- $ --
Average monthly shares outstanding during
the period (000's) ............................... 102,267 114,350 -- --
Average amount of debt per share during
the period(7) .................................... $ 0.08 $ 0.02 $ -- $ --
</TABLE>
5
<PAGE>
- ------------
* Commencement of operations.
(1) Annualized.
(2) Prior to the waiver of expenses, the ratios of expenses to average net
assets were 1.95% (annualized), 1.48% and 1.44% for the period from May 12,
1988 to February 28, 1989, and for the fiscal years ended February 28, 1990
and February 29, 1992, respectively, and the ratios of net investment
income to average net assets were 8.91% (annualized), 10.30% and 7.60% for
the period from May 12, 1988 to February 28, 1989 and for the fiscal years
ended February 28, 1990 and February 29, 1992, respectively.
(3) Total investment return measures the change in the market value of your
investment assuming reinvestment of dividends and capital gain
distributions, if any, in accordance with the provisions of the dividend
reinvestment plan. On March 9, 1992, the shares of the Trust were initially
listed for trading on the NYSE. Accordingly, the total investment return
for the year ended February 28, 1993, covers only the period from March 9,
1992 to February 28, 1993. Total investment return for the periods prior to
the year ended February 28, 1993 is not presented since market values for
the Trust's shares were not available. Total returns for less than one year
are not annualized.
(4) Total investment return at NAV has been calculated assuming a purchase at
NAV at the beginning of each period and a sale at NAV at the end of each
period and assumes reinvestment of dividends and capital gain distributions
in accordance with the provisions of the dividend reinvestment plan. This
calculation differs from total investment return because it excludes the
effects of changes in the market values of the Trust's shares. Total
returns for less than one year are not annualized.
(5) Calculation of total return excludes the effect of the per share dilution
resulting from the rights offering as the total account value of a fully
subscribed shareholder was minimally impacted.
(6) PAII, the Trust's Investment Manager, acquired certain assets of Pilgrim
Management Corporation, the Trust's former investment manager, in a
transaction that closed on April 7, 1995.
(7) Prior to May 2, 1996, the Trust borrowed to enable it to purchase Shares in
connection with periodic tender offers. On May 2, 1996, the Trust received
shareholder approval to borrow for investment purposes. As of February 28,
1998, the Trust had outstanding borrowings of $342,000,000 under a
$515,000,000 line of credit. See "Policy on Borrowing" in this section.
(8) PAII has agreed to reduce its fee for a period of three years from November
12, 1996 (the expiration of the 1996 rights offering) to 0.60% of the
Trust's average daily net assets, plus the proceeds of any outstanding
borrowings, over $1.15 billion.
6
<PAGE>
Trust Characteristics and Composition
The following tables set forth certain information with respect to the
characteristics and the composition of the Trust's investment portfolio in
terms of percentages of net assets and total assets as of February 28, 1998.
- --------------------------------------------------------------------------------
Trust Characteristics
- --------------------------------------------------------------------------------
Net Assets $1,034,402,810
- --------------------------------------------------------------------------------
Assets Invested in Senior Loans $1,352,588,772*
- --------------------------------------------------------------------------------
Outstanding Borrowings $ 342,000,000
- --------------------------------------------------------------------------------
Total Number of Senior Loans 132
- --------------------------------------------------------------------------------
Average Amount Outstanding per Senior Loan $ 10,246,885
- --------------------------------------------------------------------------------
Total Number of Industries 28
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 90%
- --------------------------------------------------------------------------------
Average Senior Loan Amount per Industry $ 48,306,742
- --------------------------------------------------------------------------------
Weighted Average Days to Interest Rate Reset 46 days
- --------------------------------------------------------------------------------
Average Senior Loan Maturity 68 months
- --------------------------------------------------------------------------------
Average Age of Senior Loans Held in Portfolio 12 months
- --------------------------------------------------------------------------------
(*Includes Senior Loans and other securities received through restructures)
- --------------------------------------------------------------------------------
Top 10 Industries As a % of
- --------------------------------------------------------------------------------
Net Assets Total Assets
Healthcare, Education and Childcare 17.3% 12.9%
Beverage, Food and Tobacco 10.5% 7.8%
Electronics 9.9% 7.4%
Chemicals, Plastics and Rubber 8.8% 6.5%
Automobile 7.7% 5.7%
Buildings and Real Estate 6.3% 4.7%
Personal, Food and Miscellaneous Services 5.9% 4.4%
Broadcasting 5.6% 4.2%
Printing and Publishing 5.2% 3.9%
Telecommunications 5.1% 3.8%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Senior Loan Holdings As a % of
- --------------------------------------------------------------------------------
Net Assets Total Assets
MAFCO Financial Corp. 2.9% 2.2%
Community Health Systems 2.4% 1.8%
Favorite Brands International 2.3% 1.7%
Outsourcing Solutions 2.0% 1.5%
Papa Gino's, Inc. 2.0% 1.5%
Fairchild Semiconductor Corp. 2.0% 1.5%
Integrated Health Services 1.9% 1.4%
Sun Healthcare 1.9% 1.4%
24-Hour Fitness, Inc. 1.9% 1.4%
Atlas Freighter Leasing 1.9% 1.4%
- --------------------------------------------------------------------------------
7
<PAGE>
Policy on Borrowing
Beginning in May of 1996, the Trust began a policy of borrowing for investment
purposes. The Trust currently is a party to credit facilities with financial
institutions that permit the Trust to borrow up to $515,000,000. Interest is
payable on the credit facilities by the Trust at a variable rate that is a
multiple of LIBOR or the federal funds rate, plus a facility fee on unused
commitments. As of February 28, 1998, the Trust had outstanding borrowings of
$342,000,000. The Trust seeks to use proceeds from borrowing to acquire
income-producing investments which, by their terms, pay interest at a rate
higher than the rate the Trust pays on borrowings. Accordingly, borrowing has
the potential to increase the Trust's total income. The Trust is permitted to
borrow up to 33 1/3%, or such other percentage permitted by law, of its total
assets (including the amount borrowed) less all liabilities other than
borrowings. See "Risk Factors and Special Considerations -- Borrowing and
Leverage."
Trading And NAV Information
The following table shows for the Trust's Shares for the periods indicated: (1)
the high and low closing prices as shown on the NYSE Composite Transaction
Tape; (2) the NAV per Share represented by each of the high and low closing
prices as shown on the NYSE Composite Transaction Tape; and (3) the discount
from or premium to NAV per Share (expressed as a percentage) represented by
these closing prices. The table also sets forth the aggregate number of shares
traded as shown on the NYSE Composite Transaction Tape during the respective
quarter.
<TABLE>
<CAPTION>
Premium/(Discount)
Price NAV To NAV
------------------------- --------------------------- ---------------------------- Reported
High Low High Low High Low NYSE Volume
Calendar Quarter Ended ------------ ------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 $ 9.875 $ 9.000 $ 10.080 $ 10.020 ( 2.03)% (10.18)% 15,590,400
March 31, 1995 9.000 8.500 10.040 9.650 (10.36) (11.92) 24,778,200
June 30, 1995 9.250 8.750 9.650 9.600 ( 4.15) ( 8.85) 16,974,600
September 30, 1995 9.375 8.875 9.660 9.660 ( 2.95) ( 8.13) 15,325,900
December 31, 1995 9.500 9.000 9.650 9.620 ( 1.55) ( 6.45) 16,428,200
March 31, 1996 9.625 9.250 9.610 9.590 0.16 ( 3.55) 17,978,300
June 30, 1996 9.750 9.375 9.610 9.570 1.46 ( 2.04) 13,187,700
September 30, 1996 10.000 9.500 9.560 9.580 4.60 ( 0.84) 15,821,000
December 31, 1996 10.000 9.250 9.580 9.430 4.38 ( 1.91) 28,740,200
March 31, 1997 10.000 9.625 9.390 9.420 6.50 2.18 18,483,600
June 30, 1997 10.125 9.875 9.400 9.380 7.71 5.28 18,863,600
September 30, 1997 10.250 10.000 9.400 9.410 9.04 6.27 15,034,200
December 31, 1997 10.375 10.125 9.310 9.380 11.44 7.94 13,270,900
March 31, 1998 10.500 9.875 9.360 9.340 12.18 5.73 15,588,500
</TABLE>
8
<PAGE>
The following chart shows, for the Trust's Shares for the period from March 3,
1995 to May 8, 1998: (1) the closing price of the Shares as shown on the NYSE
Composite Transaction Tape; (2) the NAV of the Shares; and (3) the discount or
premium to NAV.
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
05/08/98 10.063 9.290 8.32 01/23/98 10.500 9.360 12.18
05/14/98 10.125 9.340 8.40 01/16/98 10.313 9.340 10.41
04/24/98 10.000 9.330 7.18 01/09/98 10.313 9.330 10.53
04/17/98 10.063 9.320 7.97 01/02/98 10.313 9.310 10.77
04/10/98 9.938 9.300 6.85 12/26/97 10.375 9.390 10.49
04/03/98 10.063 9.360 7.51 12/19/97 10.375 9.380 10.61
03/27/98 9.875 9.340 5.73 12/12/97 10.250 9.360 9.51
03/20/98 10.000 9.330 7.18 12/05/97 10.250 9.340 9.74
03/13/98 10.125 9.310 8.75 11/28/97 10.250 9.390 9.16
03/06/98 10.250 9.290 10.33 11/21/97 10.188 9.390 8.49
02/27/98 10.313 9.340 10.41 11/14/97 10.188 9.360 8.84
02/20/98 10.313 9.340 10.41 11/07/97 10.250 9.350 9.63
02/13/98 10.250 9.340 9.74 10/31/97 10.250 9.400 9.04
02/06/98 10.250 9.320 9.98 10/24/97 10.313 9.390 9.82
01/30/98 10.250 9.380 9.28 10/17/97 10.188 9.380 8.61
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
10/10/97 10.188 9.360 8.84 06/27/97 10.031 9.420 6.49
10/03/97 10.250 9.410 8.93 06/20/97 10.125 9.400 7.71
09/26/97 10.188 9.390 8.49 06/13/97 10.125 9.390 7.83
09/19/97 10.188 9.380 8.61 06/06/97 10.063 9.370 7.39
09/12/97 10.125 9.350 8.29 05/30/97 10.063 9.420 6.82
09/05/97 10.125 9.330 8.52 05/23/97 10.125 9.400 7.71
08/29/97 10.125 9.400 7.71 05/16/97 9.875 9.380 5.28
08/22/97 10.125 9.380 7.94 05/09/97 10.000 9.370 6.72
08/15/97 10.188 9.370 8.72 05/02/97 10.000 9.420 6.16
08/08/97 10.125 n.a. n.a. 04/25/97 10.000 9.420 6.16
08/01/97 10.188 9.430 8.03 04/18/97 10.125 9.400 7.71
07/25/97 10.125 9.410 7.60 04/11/97 10.125 9.380 7.94
07/18/97 10.000 9.380 6.61 04/04/97 10.125 9.440 7.26
07/11/97 10.000 9.380 6.61 03/28/97 9.875 9.420 4.83
07/04/97 10.000 9.430 6.04 03/21/97 9.750 9.410 3.61
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
03/14/97 10.000 9.390 6.50 11/29/96 9.375 9.450 -.79
03/07/97 10.000 9.400 6.38 11/22/96 9.375 9.430 -.58
02/28/97 9.875 9.450 4.50 11/15/96 9.375 9.560 -1.94
02/21/97 9.875 9.430 4.72 11/08/96 9.250 9.560 -3.24
02/14/97 10.000 n.a. n.a. 11/01/96 9.438 9.610 -1.80
02/07/97 9.750 9.410 3.61 10/25/96 9.625 9.600 .26
01/31/97 9.750 9.460 3.07 10/18/96 9.625 9.580 .47
01/24/97 9.813 9.440 3.95 10/11/96 9.750 9.570 1.88
01/17/97 9.750 9.430 3.39 10/04/96 9.875 9.620 2.65
01/10/97 9.875 9.410 4.94 09/27/96 9.875 9.600 2.86
01/03/97 9.875 9.390 5.17 09/20/96 9.625 9.580 .47
12/27/96 9.750 9.380 3.94 09/13/96 10.000 9.560 4.60
12/20/96 9.750 n.a. n.a. 09/06/96 9.875 n.a. n.a.
12/13/96 9.625 9.410 2.28 08/30/96 9.875 9.600 2.86
12/06/96 9.375 9.390 -.16 08/23/96 9.875 9.600 2.86
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
08/16/96 9.875 9.580 3.08 05/03/96 9.625 9.600 .26
08/09/96 9.875 9.560 3.29 04/26/96 9.500 9.580 -.84
08/02/96 9.813 9.620 2.00 04/19/96 9.625 9.570 .57
07/26/96 9.750 9.600 1.56 04/12/96 9.625 9.550 .79
07/19/96 9.625 9.580 .47 04/05/96 9.500 9.540 -.42
07/12/96 9.625 9.570 .57 03/29/96 9.625 9.610 .16
07/05/96 9.750 9.550 2.09 03/22/96 9.375 9.590 -2.24
06/28/96 9.750 9.610 1.46 03/15/96 9.375 9.570 -2.04
06/21/96 9.625 9.590 .36 03/08/96 9.375 n.a. n.a.
06/14/96 9.750 9.570 1.88 03/01/96 9.375 9.610 -2.45
06/07/96 9.625 9.560 .68 02/23/96 9.500 9.610 -1.14
05/31/96 9.500 9.610 -1.14 02/16/96 9.375 9.590 -2.24
05/24/96 9.625 9.590 .36 02/09/96 9.375 9.580 -2.14
05/17/96 9.625 9.570 .57 02/02/96 9.313 9.640 -3.40
05/10/96 9.500 9.560 -.63 01/26/96 9.375 9.620 -2.55
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
01/19/96 9.375 9.620 -2.55 10/06/95 9.375 9.610 -2.45
01/12/96 9.375 9.600 -2.34 09/29/95 9.375 9.660 -2.95
01/05/96 9.375 9.590 -2.24 09/22/95 9.250 9.640 -4.05
12/29/95 9.250 9.580 -3.44 09/15/95 9.375 9.630 -2.65
12/22/95 9.375 9.630 -2.65 09/08/95 9.250 9.610 -3.75
12/15/95 9.375 9.630 -2.65 09/01/95 9.250 9.670 -4.34
12/08/95 9.250 9.610 -3.75 08/25/95 9.250 9.640 -4.05
12/01/95 9.125 9.670 -5.64 08/18/95 9.125 9.620 -5.15
11/24/95 9.125 9.650 -5.44 08/11/95 9.000 9.610 -6.35
11/17/95 9.250 9.620 -3.85 08/04/95 9.125 9.670 -5.64
11/10/95 9.000 9.620 -6.44 07/28/95 9.000 9.650 -6.74
11/03/95 9.125 9.670 -5.64 07/21/95 8.875 9.630 -7.84
10/27/95 9.250 9.660 -4.24 07/14/95 9.000 9.620 -6.44
10/20/95 9.250 9.640 -4.05 07/07/95 9.125 9.600 -4.95
10/13/95 9.375 9.620 -2.55 06/30/95 9.125 9.650 -5.44
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
06/23/95 9.125 9.650 -5.44 03/10/95 8.750 9.610 -8.95
06/16/95 9.000 9.630 -6.54 03/03/95 8.750 9.660 -9.42
06/09/95 9.125 9.620 -5.15
06/02/95 9.000 9.670 -6.93
05/26/95 8.875 9.660 -8.13
05/19/95 9.000 9.640 -6.64
05/12/95 8.875 9.620 -7.74
05/05/95 8.875 9.600 -7.55
04/28/95 8.875 9.660 -8.13
04/21/95 8.875 9.640 -7.94
04/14/95 8.750 9.620 -9.04
04/07/95 8.750 9.610 -8.95
03/31/95 8.750 9.670 -9.51
03/24/95 8.750 9.650 -9.33
03/17/95 8.750 9.630 -9.14
Source: BLOOMBERG Financial Markets.
On May 12, 1998, the last reported sale price of a Share of the Trust's Shares
on the NYSE was $10.125. The Trust's NAV on May 12, 1998 was $9.31. See "Net
Asset Value" in the SAI. On May 12, 1998, the last reported sale price of a
share of the Trust's Common Shares on the NYSE ($10.125) represented a 8.75%
premium above NAV ($9.31) as of that date.
The Trust's Shares have traded in the market above, at, and below NAV since
March 9, 1992, when the Trust's Shares were listed on the NYSE. The Trust
cannot predict whether its Shares will trade in the future at a premium or
discount to NAV, and if so, the level of such premium or discount. Shares of
closed-end investment companies frequently trade at a discount from NAV.
9
<PAGE>
Investment Performance
Morningstar Ratings
For the three-year and five-year periods ended February 28, 1998, the Trust had
a 3 star and a 4 star Morningstar risk-adjusted performance rating, when rated
among 143 and 106 taxable bond funds, respectively. The Trust's overall rating
through February 28, 1998, was 4 stars.1 For the three-year and five-year
periods ended February 28, 1998, the Trust's risk score placed the Trust 1st
out of 32 and 29 Corporate Bond -- General funds. For the three-year and
five-year periods ended February 28, 1998, the Trust's risk score placed the
Trust 2nd and 1st out of all closed-end funds (570 and 446 closed-end funds,
respectively) tracked by Morningstar.2 Morningstar's risk score evaluates an
investment company's downside volatility relative to all other investment
companies in its class.
Lipper Rankings
According to Lipper Analytical Services, Inc. ("Lipper") (a company that
calculates and publishes rankings of closed-end and open-end management
investment companies), for the one-, three-, and five-year periods ended
February 28, 1998, the Trust ranked first among all funds in the Loan
Participation Fund Category of closed-end funds, defined by Lipper to include
closed-end management investment companies that invest in Senior Loans.
Investors should note that past performance is no assurance of future results.
Periods ended Total Number of Funds
February 28, 1998 Ranking(3) Return (3) in Category (4)
----------------- ---------- ---------- ---------------
One year 1 8.24% 7
Three years 1 28.01% 6
Five years 1 46.93% 5
- ------------
(1) The Trust's overall rating is based on a weighted average of its
performance for the three-year and five-year periods ended February 28,
1998.
(2) Morningstar's taxable bond fund category includes Corporate Bond --
General, Government Bond, International Bond and Multisector Bond funds. On
Morningstar's risk-adjusted performance rating system, funds falling into
the top 10% of all funds within their category are awarded five stars and
funds in the next 22.5% receive four stars, and the next 35% receive three
stars. Morningstar ratings are calculated from the Trust's three and five
year returns (with fee adjustment, if any) in excess of 90-day Treasury
bill returns, and a risk factor that reflects the Trust's performance below
90-day Treasury bill returns. The ratings are subject to change every
month. Morningstar ranks funds within the Corporate Bond - General category
and the closed-end universe for risk for the three, five and ten-year
periods based upon their downside volatility compared to a 90-day Treasury
bill.
(3) Ranking is based on total return. Total return is measured on the basis of
NAV at the beginning and end of each period, assuming the reinvestment of
all dividends and distributions, but not reflecting the January 1995 and
November 1996 rights offerings. The Trust's expenses were partially waived
for the fiscal year ended February 29, 1992.
(4) This category includes other closed-end investment companies that, unlike
the current practices of the Trust, offer their shares continuously and
have conducted periodic tender offers for their shares. These practices may
have affected the total returns of these companies.
10
<PAGE>
Comparative Performance -- Trailing 12 Month Average
Presented below are distribution rates for the Trust. Also shown are
distribution rates of a composite of other investment companies with investment
objectives and policies comparable to those of the Trust. In addition,
presented below are various benchmark indicators of interest and borrowing
rates. The distribution rates for the Trust and the composite of the other
investment companies are calculated using actual distributions annualized for
the preceding twelve months.
COMPARATIVE PERFORMANCE
TRAILING 12 MONTH AVERAGE
The following plot points replace a graph showing comparative yield of the
Trust, the prime rate, the 60-day LIBOR rate, and a composite of comparable
investment companies.
Pilgrim
America
Month Prime Rate Composite Prime 60-Day
Ended Trust Average Rate LIBOR
1/31/91 9.675% 9.537% 9.917% 8.063%
2/28/91 9.627% 9.501% 9.833% 7.943%
3/31/91 9.500% 9.421% 9.750% 7.792%
4/30/91 9.379% 9.340% 9.667% 7.579%
5/31/91 9.203% 9.256% 9.542% 7.386%
6/30/91 9.052% 9.031% 9.417% 7.199%
7/31/91 8.896% 8.873% 9.292% 7.032%
8/31/91 8.730% 8.660% 9.167% 6.834%
9/30/91 8.527% 8.476% 9.000% 6.600%
10/31/91 8.372% 8.270% 8.833% 6.365%
11/30/91 8.160% 8.039% 8.625% 6.084%
12/31/91 7.963% 7.779% 8.375% 5.818%
1/31/92 7.739% 7.587% 8.125% 5.574%
2/29/92 7.526% 7.340% 7.917% 5.349%
3/31/92 7.382% 7.133% 7.708% 5.157%
4/30/92 7.199% 6.959% 7.500% 4.990%
5/31/92 7.072% 6.774% 7.333% 4.823%
6/30/92 6.939% 6.674% 7.167% 4.641%
7/31/92 6.790% 6.534% 6.958% 4.432%
8/31/92 6.671% 6.353% 6.750% 4.250%
9/30/92 6.578% 6.194% 6.583% 4.063%
10/31/92 6.498% 6.041% 6.417% 3.932%
11/30/92 6.394% 5.888% 6.292% 3.844%
12/31/92 6.277% 5.838% 6.250% 3.755%
1/31/93 6.203% 5.725% 6.208% 3.677%
2/28/93 6.151% 5.705% 6.167% 3.589%
3/31/93 6.095% 5.675% 6.125% 3.500%
4/30/93 6.070% 5.698% 6.083% 3.432%
5/31/93 6.056% 5.608% 6.042% 3.375%
6/30/93 6.022% 5.521% 6.000% 3.318%
7/31/93 5.998% 5.476% 6.000% 3.302%
8/31/93 6.002% 5.460% 6.000% 3.281%
9/30/93 5.975% 5.443% 6.000% 3.281%
10/31/93 5.899% 5.453% 6.000% 3.266%
11/30/93 5.910% 5.433% 6.000% 3.224%
12/31/93 5.932% 5.475% 6.000% 3.219%
1/31/94 5.955% 5.496% 6.000% 3.214%
2/28/94 5.978% 5.489% 6.000% 3.255%
3/31/94 6.017% 5.472% 6.021% 3.302%
4/30/94 6.068% 5.388% 6.083% 3.385%
5/31/94 6.157% 5.443% 6.188% 3.484%
6/30/94 6.258% 5.545% 6.292% 3.609%
7/31/94 6.374% 5.639% 6.396% 3.734%
8/31/94 6.474% 5.744% 6.542% 3.875%
9/30/94 6.604% 5.906% 6.688% 4.042%
10/31/94 6.738% 6.012% 6.833% 4.219%
11/30/94 6.874% 6.175% 7.042% 4.432%
12/31/94 7.076% 6.374% 7.250% 4.677%
1/31/95 7.288% 6.551% 7.458% 4.927%
2/28/95 7.487% 6.791% 7.708% 5.135%
3/31/95 7.711% 7.067% 7.938% 5.333%
4/30/95 7.915% 7.261% 8.125% 5.495%
5/31/95 8.089% 7.412% 8.271% 5.625%
6/30/95 8.249% 7.598% 8.417% 5.734%
7/31/95 8.396% 7.672% 8.542% 5.828%
8/31/95 8.534% 7.761% 8.625% 5.854%
9/30/95 8.650% 7.818% 8.708% 5.911%
10/31/95 8.749% 7.886% 8.792% 5.943%
11/30/95 8.855% 7.919% 8.813% 5.930%
12/31/95 8.876% 7.877% 8.813% 5.878%
1/31/96 8.886% 7.853% 8.813% 5.812%
2/29/96 8.895% 7.670% 8.750% 5.739%
3/31/96 8.836% 7.534% 8.688% 5.677%
4/30/96 8.773% 7.441% 8.625% 5.622%
5/31/96 8.727% 7.407% 8.563% 5.573%
6/30/96 8.671% 7.257% 8.500% 5.527%
7/31/96 8.639% 7.203% 8.458% 5.503%
8/31/96 8.612% 7.147% 8.417% 5.524%
9/30/96 8.590% 7.066% 8.375% 5.493%
10/31/96 8.577% 7.033% 8.333% 5.456%
11/30/96 8.563% 7.002% 8.292% 5.422%
12/31/96 8.567% 6.896% 8.271% 5.413%
1/31/97 8.569% 6.814% 8.250% 5.422%
2/28/97 8.564% 6.869% 8.250% 5.436%
3/31/97 8.595% 6.879% 8.271% 5.459%
4/30/97 8.647% 6.908% 8.292% 5.483%
5/31/97 8.666% 6.913% 8.313% 5.507%
6/30/97 8.715% 6.936% 8.333% 5.523%
7/31/97 8.734% 6.960% 8.354% 5.529%
8/31/97 8.744% 6.964% 8.375% 5.544%
9/30/97 8.758% 6.967% 8.396% 5.560%
10/31/97 8.768% 6.987% 8.417% 5.581%
11/30/97 8.771% 6.970% 8.438% 5.615%
12/31/97 8.777% 7.064% 8.458% 5.633%
1/31/98 8.780% 7.066% 8.479% 5.639%
2/28/98 8.777% 7.081% 8.500% 5.655%
- ------------
(1) The distribution rate is the annualization of the Trust's distributions per
Share, divided by the NAV of the Trust at month-end. For the one-year and
five-year periods ended February 28, 1998 and the period of May 12, 1988
(inception of the Trust) to February 28, 1998, the Trust's average annual
total returns, based on NAV and assuming all rights were exercised, were
8.01%, 7.97%, and 8.47%, respectively. The Trust's 30-day standardized SEC
yields as of February 28, 1998 were 8.60% at NAV and 7.77% at market. The
Trust's expenses were partially waived for the fiscal year ended February
29, 1992. As part of the 1996 rights offering the Investment Manager has
voluntarily reduced its management fee for the period from November 1996
through November 1999.
(2) The composite represents an unweighted average for investment companies
included in Lipper Analytical Services, Inc.'s Loan Participation Fund
Category of closed-end funds (for funds excluding the Trust in existence
for the entire period shown). Historical yields are based on monthly
dividends divided by corresponding month-end NAVs, annualized. The
closed-end investment companies reflected in the composite, unlike the
current practices of the Trust, offer their shares continuously and have
conducted periodic tender offers for their shares. These practices may have
affected the yield of these companies.
(3) The distribution rate is based solely on the actual dividends and
distributions, which are made at the discretion of management. The
distribution rate may or may not include all investment income, and
ordinarily will not include capital gains or losses, if any.
(4) Source: BLOOMBERG Financial Markets.
(5) Source: IDD/Tradeline. The LIBOR rate is the London Inter-Bank Offered Rate
and is the benchmark for determining the interest paid on more than 90% of
the Senior Loans in the Trust's portfolio. Generally, the yield on such
loans has reflected, during the periods presented, a premium of
approximately 2% or more to LIBOR.
11
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide as high a level of current
income as is consistent with the preservation of capital. The Trust seeks to
achieve its objective primarily by investing in interests in variable or
floating rate Senior Loans, which, in most circumstances, are fully
collateralized by assets of a corporation, partnership, limited liability
company, or other business entity that is organized or domiciled in the United
States, Canada or in U.S. territories and/or possessions. The Trust primarily
invests in Senior Loans that have interest rates that float periodically based
upon a benchmark indicator of prevailing interest rates, such as the Prime Rate
or LIBOR, and will invest only in Senior Loans that are U.S.
dollar-denominated. Under normal circumstances, at least 80% of the Trust's
gross assets is invested in Senior Loans.
Under the Trust's policies, Senior Loans are considered loans that hold a
senior position in the capital structure of the borrower. These may include
loans that hold the most senior position, that hold an equal ranking with other
senior debt, or loans that are, in the judgment of PAII, in the category of
senior debt of the borrower. Generally, the Senior Loans in which the Trust
invests are fully collateralized with assets and/or cash flow that PAII
believes have a market value at the time of acquisition that equals or exceeds
the principal amount of the Senior Loan. The Trust also only purchases
interests in Senior Loans of borrowers that PAII believes can meet debt service
requirements from cash flow. Senior Loans vary in yield according to their
terms and conditions, how often they pay interest, and when rates are reset.
The Trust does not invest in Senior Loans whose interest rates are tied to
non-domestic interest rates other than LIBOR.
Senior Loans that the Trust may acquire include participation interests in
lease financings ("Lease Participations") where the collateral quality, credit
quality of the borrower and the likelihood of payback are believed by PAII to
be the same as those applied to conventional Senior Loans. A Lease
Participation is also required to have a floating interest rate that is indexed
to a benchmark indicator of prevailing interest rates, such as LIBOR or the
Prime Rate.
Subject to certain limitations, the Trust may acquire Senior Loans of borrowers
engaged in any industry. With respect to no more than 25% of its total assets,
the Trust may acquire Senior Loans that are unrestricted as to the percentage
of a single issue the Trust may hold and, with respect to at least 75% of its
total assets, the Trust will hold no more than 25% of the amount borrowed from
all lenders in a single Senior Loan or other issue. The investment standards in
this paragraph are fundamental and may not be changed without approval by
Shareholders.
Investors should recognize that there can be no assurance that the investment
objective of the Trust will be realized. Moreover, substantial increases in
interest rates may cause an increase in loan defaults as borrowers may lack
resources to meet higher debt service requirements. The value of the Trust's
assets may also be affected by other uncertainties such as economic
developments affecting the market for Senior Loans or affecting borrowers
generally. For additional information on Senior Loans, see "General Information
on Senior Loans -- About Senior Loans."
Investment in the Trust's shares is intended to offer several benefits. The
Trust offers investors the opportunity to seek a high level of current income
by investing in a professionally managed portfolio comprised primarily of
Senior Loans, a type of investment typically not available directly to
individual investors. Other benefits are the professional credit analysis
provided to the Trust by the Investment Manager and portfolio diversification.
The Trust can normally be expected to have a more stable net asset value per
share than investment companies investing primarily in fixed income securities
(other than money market funds and some short-term bond funds). Generally, the
net asset value of the shares of an investment company which invests primarily
in fixed-income securities changes as interest rates fluctuate. When interest
rates decline, the value of a fixed-income portfolio normally can be expected
to increase. The Investment Manager expects the Trust's net asset value to be
relatively stable during normal market conditions, because the floating and
variable rate Senior Loans in which the Trust invests float periodically in
response to changes in interest rates. However, because variable interest rates
only reset periodically, the Trust's net asset value may fluctuate from time to
time in the event of an imperfect correlation between the interest rates on the
Trust's loans and prevailing interest rates. Also, a default on a Senior Loan
in which the Trust has invested or a
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sudden and extreme increase in prevailing interest rates may cause a decline in
the Trust's net asset value. Changes in interest rates can be expected to
affect the dividends paid by the Trust, so that the yield on an investment in
the Trust's shares will likely fluctuate in response to changes in prevailing
interest rates.
Portfolio Maturity
Although the Trust has no restrictions on portfolio maturity, normally at least
80% of the net assets invested in Senior Loans are composed of Senior Loans
with maturities of one to ten years with rates of interest which typically
reset either daily, monthly, or quarterly. The maximum period of time of
interest rate reset on any Senior Loans in which the Trust may invest is one
year. In addition, the Trust will ordinarily maintain a dollar-weighted average
time to next interest rate adjustment on its Senior Loans of 90 days or less.
In the event of a change in the benchmark interest rate on a Senior Loan, the
rate payable to lenders under the Senior Loan will, in turn, change at the next
scheduled reset date. If the benchmark rate goes up, the Trust as lender would
earn interest at a higher rate, but only on and after the reset date. If the
benchmark rate goes down, the Trust as lender would earn interest at a lower
rate, but only on and after the reset date.
Credit Analysis
In acquiring a Senior Loan, PAII considers the following factors: positive
cashflow coverage of debt service; adequate working capital; appropriate
capital structure; leverage ratio consistent with industry norms; historical
experience of attaining business and financial projections; the quality and
experience of management; and adequate collateral coverage. The Trust does not
impose any minimum standard regarding the rating of any outstanding debt
securities of borrowers.
PAII performs its own independent credit analysis of the borrower. In so doing,
PAII may utilize information and credit analyses from the agents that originate
or administer loans, other lenders investing in a Senior Loan, and other
sources. These analyses will continue on a periodic basis for any Senior Loan
purchased by the Trust. See "Risk Factors and Special Considerations -- Credit
Risks and Realization of Investment Objective."
Other Investments
Assets not invested in Senior Loans will generally consist of other
instruments, including Hybrid Loans, unsecured loans, subordinated loans,
short-term debt instruments with remaining maturities of 120 days or less
(which may have yields tied to the Prime Rate, commercial paper rates, federal
funds rate or LIBOR), longer term debt securities, equity securities acquired
in connection with investment or restructuring of a Senior Loan, and other
instruments as described under "Additional Information About Investments and
Investment Techniques" in the SAI. Short-term instruments may include (i)
commercial paper rated A-1 by Standard & Poor's Ratings Services or P-1 by
Moody's Investors Service, Inc., or of comparable quality as determined by
PAII, (ii) certificates of deposit, bankers' acceptances, and other bank
deposits and obligations, and (iii) securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. During periods when, in the
opinion of PAII, a temporary defensive posture in the market is appropriate,
the Trust may hold up to 100% of its assets in cash, or in the instruments
described above
Hybrid Loans
The growth of the syndicated loan market has produced loan structures with
characteristics similar to Senior Loans but which resemble bonds in some
respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans"). The
Trust may invest only in Hybrid Loans that are secured debt of the borrower,
although they may not in all instances be considered senior debt of the
borrower. With Hybrid Loans, the Trust may not possess a senior claim to all of
the collateral securing the Hybrid Loan. Hybrid Loans also may not include
covenants that are typical of Senior Loans, such as covenants requiring the
maintenance of minimum interest coverage ratios. As a result, Hybrid Loans
present additional risks besides those associated with traditional Senior
Loans, although they may provide a relatively higher yield. Because the lenders
in Hybrid Loans waive or forego certain loan covenants, their negotiating power
or voting rights in the event of a default may be diminished.
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As a result, the lenders' interests may not be represented as significantly as
in the case of a conventional Senior Loan. In addition, because the Trust's
security interest in some of the collateral may be subordinate to other
creditors, the risk of nonpayment of interest or loss of principal may be
greater than would be the case with conventional Senior Loans. The Trust will
invest only in Hybrid Loans which meet credit standards established by PAII
with respect to Hybrid Loans and nonetheless provide certain protections to the
lender such as collateral maintenance or call protection. The Trust may only
invest up to 20% of its assets in Hybrid Loans as part of its investment in
"Other Investments" as described above, and Hybrid Loans will not count toward
the 80% of the Trust's assets that are normally invested in Senior Loans.
Subordinated and Unsecured Loans
The Trust may also invest up to 5% of its total assets, measured at the time of
investment, in subordinated and unsecured loans. The Trust may acquire a
subordinated loan only if, at the time of acquisition, it acquires or holds a
Senior Loan from the same borrower. The primary risk arising from a holder's
subordination is the potential loss in the event of default by the issuer of
the loans. Subordinated loans in an insolvency bear an increased share,
relative to senior secured lenders, of the ultimate risk that the borrower's
assets are insufficient to meet its obligations to its creditors. Unsecured
loans are not secured by any specific collateral of the borrower. They do not
enjoy the security associated with collateralization and may pose a greater
risk of nonpayment of interest or loss of principal than do secured loans. The
Trust will acquire unsecured loans only where the Investment Manager believes,
at the time of acquisition, that the Trust would have the right to payment upon
default that is not subordinate to any other creditor. Subordinated and
unsecured loans will constitute part of the Trust's investment in "Other
Investments" as described above, and will not count toward the 80% of the
Trust's assets that are normally invested in Senior Loans. The maximum of 5% of
the Trust's assets invested in subordinated and unsecured loans will constitute
part of the 20% of the Trust's assets that may be invested in "Other
Investments" as described above, and will not count toward the 80% of the
Trust's assets that are normally invested in Senior Loans.
Use of Leverage
The Trust is permitted to borrow up to 33 1|M/3%, or such other percentage
permitted by law, of its total assets (including the amount borrowed) less all
liabilities other than borrowings.
The Trust is currently a party to credit facilities with financial institutions
that permit the Trust to borrow up to $515,000,000. Borrowing may be made for
the purpose of acquiring additional income-producing investments when the
Investment Manager believes that such use of borrowed proceeds will enhance the
Trust's net yield. The amount of outstanding borrowings may vary with
prevailing market or economic conditions. In addition, although the Trust has
not conducted a tender offer since 1992 or repurchased its shares since January
1994, in the event that it determines to again conduct a tender offer or
repurchase its shares, the Trust may use borrowings to finance the purchase of
its shares. For information on risks associated with borrowing, see "Risk
Factors and Special Considerations -- Borrowing and Leverage."
Policies Subject to Shareholder Approval
Certain of the investment policies of the Trust described above have been
approved by the Board of Trustees of the Trust, but will not be effective until
approved by a majority of the shareholders of the Trust. These policies are
those (i) permitting the Trust to invest in Senior Loans of business entities
other than corporations, (ii) treating investments in Lease Participations as
Senior Loans, and (iii) permitting the Trust to invest in certain Hybrid Loans
and in unsecured loans. The proposed policy changes will be submitted to
shareholders for their approval at the Trust's annual shareholders meeting
currently scheduled for August, 1998.
GENERAL INFORMATION ON SENIOR LOANS
Primary Market Overview
The primary market for Senior Loans has become much larger and varied in recent
years. The volume of loans originated in the Senior Loan market has increased
from $376 billion in 1992 to $1.1 trillion in
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1997. Senior Loans tailored to the institutional investor, such as the Trust,
have increased from $2.5 billion in 1993 to nearly $25.0 billion in 1997. In
1997, the volume of leveraged loans (priced at LIBOR + 1.5% or higher) reached
the highest level since 1989 with $194.0 billion in volume. Leveraged loan
volume of $74.5 billion in the fourth quarter of 1997 is above fourth quarter
volume in each of the preceding two years.
Year Volume($bil.)
1988 284.4
1989 333.2
1990 241.3
1991 234.4
1992 375.5
1993 389.3
1994 665.3
1995 816.9
1996 887.6
1997 1111.9
Source: Loan Pricing Corporation.
The total Senior Loan market for both leveraged and non-leveraged transactions
has averaged an annual growth rate of 24.2% since 1992. The Trust's net assets,
$734 million at the end of 1992 and $1 billion at the end of 1997, have grown
at an average annual growth rate of 7.0% for the same period.
At the same time primary Senior Loan volume has grown, demand has remained
strong as institutional investors other than banks have begun to enter the
Senior Loan market. Investment companies, insurance companies, and private
investment vehicles are joining U.S. and foreign banks as lenders. The entrance
of new investors has helped grow the bank loan trading market with record
volume of $62.0 billion during 1997. The active secondary market, coupled with
banks' focus on portfolio management and the move toward standard market
practices, has helped increase the liquidity for Senior Loans. With this growth
in volume and demand, Senior Loans have adopted innovative structures and
characteristics, as described elsewhere in this Prospectus.
About Senior Loans
Senior Loans vary from other types of debt in that they generally hold the most
senior position in the capital structure of a borrower. Priority liens are
obtained by the lenders that typically provide the first right to cash flows or
proceeds from the sale of a borrower's collateral if the borrower becomes
insolvent (subject to the limitations of bankruptcy law, which may provide
higher priority to certain claims such as, for example, employee salaries,
employee pensions and taxes). Thus, Senior Loans are generally repaid before
unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and
preferred or common stockholders.
Senior Loans typically will be secured by pledges of collateral from the
borrower in the form of tangible assets such as cash, accounts receivable,
inventory, property, plant and equipment, common and/or preferred stock of
subsidiaries, and intangible assets including trademarks, copyrights, patent
rights and franchise value. The Trust may also receive guarantees as a form of
collateral. The Trust may invest in Senior
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<PAGE>
Loans that are secured only by stock of the borrower or its subsidiaries or
affiliates. Generally, the agent on a Senior Loan is responsible for monitoring
collateral and for exercising remedies available to the lenders such as
foreclosure upon collateral.
Senior Loans generally are arranged through private negotiations between a
borrower and several financial institutions ("lenders") represented in each
case by an agent ("agent"), which usually is one or more of the lenders. The
Trust will acquire Senior Loans from and sell Senior Loans to the following
lenders: money center banks, selected regional banks and selected non-banks,
insurance companies, finance companies, other investment companies, private
investment funds, and lending companies. The Trust may also acquire Senior
Loans from and sell Senior Loans to U.S. branches of foreign banks which are
regulated by the Federal Reserve System or appropriate state regulatory
authorities. On behalf of the lenders, generally the agent is primarily
responsible for negotiating the loan agreement ("loan agreement"), which
establishes the terms and conditions of the Senior Loan and the rights of the
borrower and the lenders. The agent and the other original lenders typically
have the right to sell interests ("participations") in their share of the
Senior Loan to other participants. The agent and the other original lenders
also may assign all or a portion of their interests in the Senior Loan to other
participants.
The Trust's investment in Senior Loans generally may take one of several forms
including: acting as one of the group of lenders originating a Senior Loan (an
"original lender"); purchase of an assignment ("assignment") or a portion of a
Senior Loan from a third party, or acquiring a participation in a Senior Loan.
The Trust may pay a fee or forego a portion of interest payments to the lender
selling a participation or assignment under the terms of such participation or
assignment.
The agent that arranges a Senior Loan is frequently a commercial or investment
bank or other entity that originates a Senior Loan and the entity that invites
other parties to join the lending syndicate. In larger transactions, it is
common to have several agents; however, generally only one such agent has
primary responsibility for documentation and administration of the Senior Loan.
Agents are typically paid fees by the borrower for their services. The Trust
may serve as the agent or co-agent for a Senior Loan. See "Additional
Information About Investments and Investment Techniques -- Originating Senior
Loans" in the SAI.
When the Trust is a member of the originating syndicate group for a Senior
Loan, it may share in a fee paid to the original lenders. When the Trust is an
original lender or acquires an assignment, it will have a direct contractual
relationship with the borrower, may enforce compliance by the borrower with the
terms of the Senior Loan agreement, and may have rights with respect to any
funds acquired by other lenders through set-off. Lenders also have certain
voting and consent rights under the applicable Senior Loan agreement. Action
subject to lender vote or consent generally requires the vote or consent of the
holders of some specified percentage of the outstanding principal amount of the
Senior Loan. Certain decisions, such as reducing the amount or increasing the
time for payment of interest on or repayment of principal of a Senior Loan, or
releasing collateral therefor, frequently require the unanimous vote or consent
of all lenders affected.
When the Trust is a purchaser of an assignment it typically succeeds to all the
rights and obligations under the loan agreement of the assigning lender and
becomes a lender under the loan agreement with the same rights and obligations
as the assigning lender. Assignments are, however, arranged through private
negotiations between potential assignees and potential assignors, and the
rights and obligations acquired by the purchaser of an assignment may be more
limited than those held by the assigning lender. The Trust will purchase an
assignment or act as lender with respect to a syndicated Senior Loan only where
the agent with respect to such Senior Loan is determined by the Investment
Manager to be creditworthy at the time of acquisition.
To a lesser extent, the Trust invests in participations in Senior Loans. With
respect to any given Senior Loan, the rights of the Trust when it acquires a
participation may be more limited than the rights of original lenders or of
investors who acquire an assignment. Participations may entail certain risks
relating to the creditworthiness of the parties from which the participations
are obtained. Participation by the Trust in a lender's portion of a Senior Loan
typically results in the Trust having a contractual relationship only with the
lender, not with the borrower. The Trust has the right to receive payments of
principal, interest and any fees to which it is entitled only from the lender
selling the participation and only upon receipt by such
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lender of such payments from the borrower. In connection with purchasing
participations, the Trust generally will have no right to enforce compliance by
the borrower with the terms of the Senior Loan agreement, nor any rights with
respect to any funds acquired by other lenders through set-off against the
borrower with the result that the Trust may be subject to delays, expenses and
risks that are greater than those that exist where the Trust is the original
lender, and the Trust may not directly benefit from the collateral supporting
the Senior Loan because it may be treated as a creditor of the lender instead
of the borrower. As a result, the Trust may assume the credit risk of both the
borrower and the lender selling the participation. In the event of insolvency
of the lender selling a participation, the Trust may be treated as a general
creditor of such lender, and may not benefit from any set-off between such
lender and the borrower. In the event of bankruptcy or insolvency of the
borrower, the obligation of the borrower to repay the Senior Loan may be
subject to certain defenses that can be asserted by such borrower as a result
of improper conduct of the lender selling the participation. The Trust will
only acquire participations if the lender selling the participations and any
other persons interpositioned between the Trust and the lender are determined
by the Investment Manager to be creditworthy.
When the Trust is an original lender, it will have a direct contractual
relationship with the borrower. If the terms of an interest in a Senior Loan
provide that the Trust is in privity with the borrower, the Trust has direct
recourse against the borrower in the event the borrower fails to pay scheduled
principal or interest. In all other cases, the Trust looks to the agent to use
appropriate credit remedies against the borrower. When the Trust purchases an
assignment, the Trust typically succeeds to the rights of the assigning lender
under the Senior Loan agreement, and becomes a lender under the Senior Loan
agreement. When the Trust purchases a participation in a Senior Loan, the Trust
typically enters into a contractual arrangement with the lender selling the
participation, and not with the borrower.
Should an agent become insolvent, or enter Federal Deposit Insurance
Corporation ("FDIC") receivership or bankruptcy, any interest in the Senior
Loan transferred by such person and any Senior Loan repayment held by the agent
for the benefit of participants may be included in the agent's estate where the
Trust acquires a participation interest from an original lender, should that
original lender become insolvent, or enter FDIC receivership or bankruptcy, any
interest in the Senior Loan transferred by the original lender may be included
in its estate. In such an event, the Trust might incur certain costs and delays
in realizing payment or may suffer a loss of principal and interest.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain risks that should be considered, among others,
in connection with an investment in the Trust. For further information on risks
associated with the possible investments of the Trust, see "Additional
Information About Investments and Investment Techniques" in the Statement of
Additional Information.
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements." All statements, other than statements of
historical facts, included in this Prospectus that address activities, events
or developments that the Trust or PAII, as the case may be, expects, believes
or anticipates will or may occur in the future, including such matters as the
use of proceeds, investment strategies, and other such matters could be
considered forward-looking statements. These statements are based on certain
assumptions and analyses made by the Trust or PAII, as the case may be, in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, including the risk factors discussed
below, general economic and business conditions, the investment opportunities
(or lack thereof) that may be presented to and pursued by the Trust, changes in
laws or regulations and other factors, many of which are beyond the control of
the Trust. Prospective investors are cautioned that any such statements are not
guarantees of future performance and that actual results or developments may
differ materially from those described in the forward-looking statements.
Discount From or Premium To NAV. The Trust's Shares have traded in the market
above, at, and below NAV since March 9, 1992, when the Trust's shares were
listed on the NYSE. The reasons for the Trust's Shares trading at a premium to
or discount from NAV are not known to the Trust, nor can the Trust
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<PAGE>
predict whether its Shares will trade in the future at a premium to or discount
from NAV, and if so, the level of such premium or discount. Shares of
closed-end investment companies frequently trade at a discount from NAV. The
possibility that shares of the Trust will trade at a discount from NAV is a
risk separate and distinct from the risk that the Trust's NAV may decrease.
Shares will be issued by the Trust pursuant to the Program only if the market
price of the Shares, plus the estimated commissions of purchasing the Shares on
the secondary market, is greater than NAV. In some circumstances, as described
under "Plan of Distribution," the Trust may issue Shares at a price equal to a
premium above NAV pursuant to the terms of the Program. At any time when shares
of a closed-end investment company are purchased at a premium above NAV, the
NAV of the shares purchased is less than the amount invested by the
shareholder. Furthermore, to the extent that the Shares of the Trust are issued
at a price equal to a premium above NAV, the Trust will receive and benefit
from the difference in those amounts.
Credit Risks and Realization of Investment Objective. While all investments
involve some amount of risk, Senior Loans generally involve less risk than
equity instruments of the same issuer because the payment of principal of and
interest on debt instruments is a contractual obligation of the issuer that, in
most instances, takes precedence over the payment of dividends, or the return
of capital, to the issuer's shareholders. Although the Trust will generally
invest in Senior Loans that will be fully collateralized with assets whose
market value, at the time of acquisition, equals or exceeds the principal
amount of the Senior Loan, the value of the collateral may decline below the
principal amount of the Senior Loan subsequent to the Trust's investment in
such Senior Loan. In addition, to the extent that collateral consists of stock
of the borrower or its subsidiaries or affiliates, the Trust will be subject to
the risk that this stock may decline in value, be relatively illiquid, or may
lose all or substantially all of its value, causing the Senior Loan to be
undercollateralized. Senior Loans are also subject to the risk of nonpayment of
scheduled interest or principal payments. In the event of a failure to pay
scheduled interest or principal payments on Senior Loans held by the Trust, the
Trust could experience a reduction in its income, and would experience a
decline in the market value of the particular Senior Loan so affected, and may
experience a decline in the NAV of Trust Shares or the amount of its dividends.
To the extent that the Trust's investment is in a Senior Loan acquired from
another lender, the Trust may be subject to certain credit risks with respect
to that lender. See "About Senior Loans." Further, there is no assurance that
the liquidation of the collateral underlying a Senior Loan would satisfy the
issuer's obligation to the Trust in the event of non-payment of scheduled
interest or principal, or that collateral could be readily liquidated. The risk
of non-payment of interest and principal also applies to other debt instruments
in which the Trust may invest. As of February 28, 1998, approximately 1.31% of
the Trust's net assets and .97% of total assets consisted of non-performing
Senior Loans.
In the event of a bankruptcy of the borrower, the Trust could experience delays
or limitations with respect to its ability to realize the benefits of the
collateral securing the Senior Loan. Among the credit risks involved in a
bankruptcy would be an assertion that the pledging of collateral to secure the
Senior Loan constituted a fraudulent conveyance or preferential transfer that
would have the effect of nullifying or subordinating the Trust's rights to the
rights of other creditors of the borrower under applicable law.
Investment decisions will be based largely on the credit analysis performed by
the Investment Manager's investment personnel, and such analysis may be
difficult to perform for many issuers. Information about interests in Senior
Loans generally will not be in the public domain, and interests are generally
not currently rated by any nationally recognized rating service. Many issuers
have not issued securities to the public and are not subject to reporting
requirements under federal securities laws. Generally, issuers are required to
provide financial information to lenders, including the Trust, and information
may be available from other Senior Loan participants or agents that originate
or administer Senior Loans.
While debt instruments generally are subject to the risk of changes in interest
rates, the interest rates of the Senior Loans in which the Trust will invest
will float with a specified interest rate. Thus the risk that changes in
interest rates will affect the market value of such Senior Loans is
significantly decreased.
Borrowing and Leverage. The Trust is permitted to enter into borrowing
transactions representing up to 33 1|M/3% (or such other percentage permitted
by law) of its total assets (including the amount borrowed) less all
liabilities other than borrowings. Borrowing for investment purposes increases
both investment
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opportunity and investment risk. Capital raised through borrowings will be
subject to interest and other costs. There can be no assurance that the Trust's
income from borrowed proceeds will exceed these costs; however, the Investment
Manager seeks to borrow for the purposes of making additional investments only
if it believes, at the time of entering into a Senior Loan, that the total
return on such investment will exceed interest payments and other costs. In
addition, the Investment Manager intends to mitigate the risk that the costs of
borrowing will exceed the total return on an investment by borrowing on a
variable rate basis. In the event of a default on one or more Senior Loans or
other interest-bearing instruments held by the Trust, borrowing would
exaggerate the loss to the Trust and may exaggerate the effect on the Trust's
NAV. The Trust's lenders will have priority to the Trust's assets over the
Trust's Shareholders.
As prescribed by the Investment Company Act of 1940, as amended (the
"Investment Company Act"), the Trust will be required to maintain specified
asset coverages of at least 300% with respect to any bank borrowing immediately
following any such borrowing and on an ongoing basis as a condition of
declaring dividends. The Trust's inability to make distributions as a result of
these requirements could cause the Trust to fail to qualify as a regulated
investment company and/or subject the Trust to income or excise taxes.
The interest rate on the Trust's credit facilities as of February 28, 1998, was
a variable rate based on LIBOR or the federal funds rate at the Trust's option,
plus 0.40% of outstanding borrowings on the 364-day credit facility and 0.375%
of outstanding borrowings on the four-year credit facility, plus a facility fee
on unused commitments of 0.10% on the 364-day credit facility and 0.125% on the
four-year credit facility. At such rates, and assuming the Trust borrowed an
amount equal to 33 1|M/3% of its total net assets plus borrowings, the Trust
must produce a 2.05% annual return (net of expenses) in order to cover interest
payments. The Trust intends to borrow only for investment purposes when it
believes at the time of borrowing that total return on investment will exceed
interest and other costs.
The following table is designed to illustrate the effect on return to a holder
of the Trust's Common Shares of the leverage obtained by the Trust's use of
borrowing, assuming hypothetical annual returns on the Trust's portfolio of
minus 10 to plus 10 percent. As can be seen, leverage generally increases the
return to shareholders when portfolio return is positive and decreases return
when the portfolio return is negative. Actual returns may be greater or less
than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return, net of expenses(1) .... (10%) (5%) 0% 5% 10%
Corresponding Return to Common Shareholders(2) .. (18.07%) (10.57%) (3.07%) 4.43% 11.92%
</TABLE>
- ------------
(1) The Assumed Portfolio Return is required by regulation of the Commission
and is not a prediction of, and does not represent, the projected or actual
performance of the Trust.
(2) In order to compute the "Corresponding Return to Common Shareholders," the
"Assumed Portfolio Return" is multiplied by the total value of the Trust's
assets at the beginning of the Trust's fiscal year to obtain an assumed
return to the Trust. From this amount, all interest accrued during the year
is subtracted to determine the return available to Shareholders. The return
available to Shareholders is then divided by the total value of the Trust's
net assets as of the beginning of the fiscal year to determine the
"Corresponding Return to Common Shareholders."
Secondary Market for the Trust's Shares. The issuance of Shares through the
Program may have an adverse effect on the secondary market for the Trust's
Shares. The increase in the amount of the Trust's outstanding Shares resulting
from issuances pursuant to the Program or pursuant to privately negotiated
transactions, and the discount to the market price at which the Shares may be
issued, may put downward pressure on the market price for Shares of the Trust.
Shares will not be issued pursuant to the Program at any time when Shares are
trading at a price lower than the Trust's NAV per Share.
When the Trust's Shares are trading at a premium, the Trust may also issue
Shares of the Trust that are sold through transactions effected on the NYSE.
The increase in the amount of the Trust's outstanding Shares resulting from
that offering may put downward pressure on the market price for the Shares of
the Trust.
Limited Secondary Market for Senior Loans. Although it is growing, the
secondary market for Senior Loans is currently limited. Accordingly, some or
many of the Senior Loans in which the Trust invests will be relatively
illiquid. The Trust may have difficulty disposing of illiquid assets if it
needs cash to repay debt,
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to pay dividends, to pay expenses or to take advantage of new investment
opportunities. Although the Trust has not conducted a tender offer since 1992,
in the event that it determines to again conduct a tender offer, limitations of
a secondary market may result in difficulty in raising cash to purchase
tendered Shares. These events may cause the Trust to sell securities at lower
prices than it would otherwise consider to meet cash needs and may cause the
Trust to maintain a greater portion of its assets in cash equivalents than it
would otherwise, which could negatively impact performance. If the Trust
purchases a relatively large Senior Loan to generate income, the limitations of
the secondary market may inhibit the Trust from selling a portion of the Senior
Loan and reducing its exposure to a borrower when the Investment Manager deems
it advisable to do so.
In addition, because the secondary market for Senior Loans may be limited, it
may be difficult to value Senior Loans. Market quotations may not be available
and valuation may require more research than for liquid securities. In
addition, elements of judgment may play a greater role in the valuation,
because there is less reliable, objective data available.
Demand for Senior Loans. Although the volume of Senior Loans has increased in
recent years, demand for Senior Loans has also grown. An increase in demand may
benefit the Trust by providing increased liquidity for Senior Loans, but may
also adversely affect the rate of interest payable on Senior Loans acquired by
the Trust and the rights provided to the Trust under the terms of the Senior
Loan.
DESCRIPTION OF THE TRUST
The Trust was organized as a Massachusetts business trust on December 2, 1987,
and is registered with the Commission as a diversified, closed-end management
investment company under the Investment Company Act. The Trust's Agreement and
Declaration of Trust, a copy of which is on file in the office of the Secretary
of State of the Commonwealth of Massachusetts, authorizes the issuance of an
unlimited number of shares of beneficial interest without par value.
The Trust issues shares of beneficial interest in the Trust. Under
Massachusetts law, shareholders could, under certain circumstances, be held
liable for the obligations of the Trust. However, the Agreement and Declaration
of Trust disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given to all parties in each
agreement, obligation or instrument entered into or executed by the Trust or
the Trustees, and each party thereto must expressly waive all rights or any
action directly against Shareholders. The Agreement and Declaration of Trust
provides for indemnification out of the Trust's property for all loss and
expense of any Shareholder of the Trust held liable on account of being or
having been a Shareholder. Thus, the risk of a Shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Trust would be unable to meet its obligations wherein the complaining party
was held not to be bound by the disclaimer.
As of April 30, 1998, to the best of the Trust's knowledge, no Shareholders
owned of record or beneficially more than 5% of the outstanding Shares of the
Trust. The number of Shares outstanding as of May 12, 1998 was 111,017,618,
none of which were held by the Trust. The Shares are listed on the NYSE.
Dividends, Voting and Liquidation Rights
Each Share of the Trust has one vote and shares equally in dividends and
distributions when and if declared by the Trust and in the Trust's net assets
upon liquidation. All Shares, when issued, are fully paid and are
non-assessable by the Trust. There are no preemptive or conversion rights
applicable to any of the Shares. Trust Shares do not have cumulative voting
rights and, as such, holders of more than 50% of the Shares voting for trustees
can elect all trustees and the remaining Shareholders would not be able to
elect any trustees.
Status of Shares
The Board of Trustees may classify or reclassify any unissued Shares of the
Trust into Shares of any series by setting or changing in any one or more
respects, from time to time, prior to the issuance of such
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Shares, the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such shares. Any such classification or
reclassification will comply with the provisions of the Investment Company Act.
Fundamental and Non-Fundamental Policies of the Trust
The investment objective of the Trust, certain policies of the Trust specified
herein as "fundamental" and the investment restrictions of the Trust described
in the Statement of Additional Information are fundamental policies of the
Trust and may not be changed without a "Majority Vote" of the shareholders of
the Trust. The term "Majority Vote" means the affirmative vote of (a) more than
50% of the outstanding shares of the Trust or (b) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares of the Trust
are represented at the meeting in person or by proxy, whichever is less. All
other policies of the Trust may be modified by resolution of the Board of
Trustees of the Trust.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Manager
PAII, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004, serves as
Investment Manager to the Trust and has overall responsibility for the
management of the Trust. The Trust and PAII have entered into an Investment
Management Agreement that requires PAII to provide all investment advisory and
portfolio management services for the Trust. It also requires PAII to assist in
managing and supervising all aspects of the general day-to-day business
activities and operations of the Trust, including custodial, transfer agency,
dividend disbursing, accounting, auditing, compliance and related services.
PAII provides the Trust with office space, equipment and personnel necessary to
administer the Trust. The agreement with PAII can be canceled by the Board of
Trustees upon 60 days' written notice. Organized in December 1994, PAII is
registered as an investment adviser with the Commission. PAII serves as
investment manager to seven other registered investment companies (or series
thereof), as well as privately managed accounts, and currently has assets under
management of approximately $4 billion as of the date of this Prospectus.
PAII is an indirect, wholly-owned subsidiary of Pilgrim America Capital
Corporation ("Pilgrim America") (NASDAQ: PACC) (formerly, Express America
Holdings Corporation). Through its subsidiaries, Pilgrim America engages in the
financial services business, focusing on providing investment advisory,
administrative and distribution services to open-end and closed-end investment
companies and private accounts.
PAII bears its expenses of providing the services described above. PAII
currently receives from the Trust an annual fee, paid monthly, of 0.85% of the
average daily net assets of the Trust, plus the proceeds of any outstanding
borrowings, up to $700 million; 0.75% of the average daily net assets of the
Trust, plus the proceeds of any outstanding borrowings, in excess of $700
million up to $800 million; and 0.65% of the average daily net assets of the
Trust, plus the proceeds of any outstanding borrowings, in excess of $800
million. PAII has agreed to reduce its fee until November 12, 1999 to 0.60% of
the average daily net assets, plus the proceeds of any outstanding borrowings,
over $1.15 billion. On May 2, 1998, the Board of Trustees approved an amendment
to the Trust's investment management agreement with PAII that changes the
investment management fee to a rate of 0.80% of the average daily net assets of
the Trust, plus the proceeds of any outstanding borrowings. The amendment will
not be effective until approved by a majority of the shareholders of the Trust.
The amendment will be submitted to shareholders for their approval at the
Trust's annual shareholders meeting currrently scheduled for August, 1998.
The Trust pays all operating and other expenses of the Trust not borne by PAII
including, but not limited to, audit and legal fees, transfer agent, registrar
and custodian fees, expenses in preparing tender offers, shareholder reports
and proxy solicitation materials and other miscellaneous business expenses. The
Trust also pays all taxes imposed on it and all brokerage commissions and
loan-related fees. The Trust is responsible for paying all of the expenses of
the Offering.
Portfolio Management. The Trust's portfolio is managed by a portfolio
management team consisting of a Senior Portfolio Manager, five Assistant
Portfolio Managers, and credit analysts.
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Howard Tiffen is a Senior Vice President of PAII and the President, Chief
Operating Officer, and Senior Portfolio Manager of the Trust. He has had
primary responsibility for investment management of the Trust since
November, 1995. Prior to November 1995, Mr. Tiffen worked as a Managing
Director of various divisions of Bank of America (and its predecessor,
Continental Bank).
James R. Reis is Executive Vice President, Chief Credit Officer, and
Assistant Secretary of the Trust. Mr. Reis is Director, Vice Chairman
(since December 1994), Executive Vice President (since April 1995), and
Treasurer (since September 1996), of PAGI and PAII and Director (since
December 1994), Vice Chairman (since November 1995) and Assistant Secretary
(since January 1995) of PASI. Mr. Reis is also Executive Vice President,
Treasurer and Assistant Secretary of each of the other funds in the Pilgrim
America Group of Funds and Chief Financial Officer (since December 1993),
Vice Chairman and Assistant Secretary (since April 1993) and former
President (May 1991-December 1993) of Pilgrim America (formerly, Express
America Holdings Corporation). Mr. Reis currently serves or has served as
an officer or director of other affiliates of Pilgrim America.
Daniel A. Norman is Senior Vice President, Treasurer and Assistant
Portfolio Manager of the Trust. He has served as Assistant Portfolio
Manager of the Trust since September 1996. Mr. Norman is a Senior Vice
President of PAGI and PAII (since December 1994), and Senior Vice President
(since November 1995) and Treasurer and Chief Financial Officer (since
April 1997) of PASI. Mr. Norman was Senior Vice President of Express
America Mortgage Corporation and Express America Holdings Corporation
(February 1992 - February 1996).
Jeffrey A. Bakalar has served as Assistant Portfolio Manager of the Trust
since January 1998. Prior to joining PAII, Mr. Bakalar was Vice President
of First National Bank of Chicago (July 1994 - January 1998) and Corporate
Finance Officer of the Securitized Products Group of Continental Bank
(November 1993 - July 1994).
Michel Prince has served as Assistant Portfolio Manager of the Trust since
May 1998. Prior to joining PAII, Mr. Prince was Vice President of Rabobank
International, Chicago Branch (July 1996 - April 1998) and Vice President
of Fuji Bank, Chicago Branch (April 1992 - July 1996).
Thomas (Tim) C. Hunt has served as Assistant Portfolio Manager of the Trust
since June 1997. He has also served as Senior Portfolio Analyst for the
Trust from December 1995 to June 1997. Prior to joining PAII, Mr. Hunt was
a Corporate Finance Analyst with Bank of America (June 1995-December 1995),
received a masters degree from the American Graduate School of
International Management (1993-1995), and worked for the Japanese Ministry
of Education in Saitama, Japan (1991-1993).
The Administrator
The Administrator of the Trust is PAGI. Its principal business address is 40
North Central Avenue, Suite 1200, Phoenix, Arizona 85004. The Administrator is
a wholly-owned subsidiary of Pilgrim America and the immediate parent company
of PAII.
Under an Administration Agreement between PAGI and the Trust, PAGI administers
the Trust's corporate affairs subject to the supervision of the Trustees of the
Trust. In that connection PAGI monitors the provisions of the Senior Loan
agreements and any agreements with respect to interests in Senior Loans and is
responsible for recordkeeping with respect to the Senior Loans in the Trust's
portfolio. PAGI also furnishes the Trust with office facilities and furnishes
executive personnel together with clerical and certain recordkeeping and
administrative services. These include preparation of annual and other reports
to shareholders and to the Commission. PAGI also handles the filing of federal,
state and local income tax returns not being furnished by the Custodian or
Transfer Agent (as defined below). The Administrator has authorized all of its
officers and employees who have been elected as Trustees or officers of the
Trust to serve in the latter capacities. All services furnished by the
Administrator under the Administration Agreement may be furnished by such
officers or employees of the Administrator.
The Trust pays PAGI for the services performed and the facilities furnished by
PAGI as Administrator a fee, computed daily and payable monthly. The
Administration Agreement states that PAGI is entitled to receive a fee at an
annual rate of 0.15% of the average daily net assets of the Trust, plus the
proceeds of any outstanding borrowings, up to $800 million; and 0.10% of the
average daily net assets of the Trust, plus the proceeds of any outstanding
borrowings, in excess of $800 million.
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Transfer Agent, Dividend Disbursing Agent and Registrar
The transfer agent, dividend disbursing agent and registrar for the Shares is
DST Systems, Inc. ("DST"), whose principal business address is 330 West 9th
Street, Kansas City, Missouri 64105. In addition, DST acquires shares on behalf
of the Trust for distribution to Shareholders under the Trust's Shareholder
Investment Program.
Custodian
The Trust's securities and cash are held under a Custody Agreement with
Investors Fiduciary Trust Company ("IFTC"), whose principal business address is
801 Pennsylvania, Kansas City, Missouri 64105.
PLAN OF DISTRIBUTION
Shareholder Investment Program
The Shares are offered by the Trust through the Trust's Shareholder Investment
Program (the "Program"). The Program allows participating Shareholders to
reinvest all dividends ("Dividends") in additional shares of the Trust, and
also allows participants to purchase additional Shares through optional cash
investments in amounts ranging from a minimum of $100 to a maximum of $5,000
per month. Subject to the permission of the Trust, participating Shareholders
may also make optional cash investments in excess of the monthly maximum.
Shares may be issued by the Trust under the Program only if the Trust's Shares
are trading at a premium to net asset value. If the Trust's Shares are trading
at a discount to net asset value, Shares purchased under the Program will be
purchased on the open market.
Shareholders may elect to participate in the Program by telephoning the Trust
or submitting a completed Participation Form to DST Systems, Inc. ("DST"), the
Program administrator. DST will credit to each participant's account funds it
receives from: (a) Dividends paid on Trust shares registered in the
participant's name and (b) optional cash investments. DST will apply all
Dividends and optional cash investments received to purchase Shares as soon as
practicable beginning on the relevant Investment Date (as described below) and
not later than six business days after the Investment Date, except when
necessary to comply with applicable provisions of the federal securities laws.
For more information in distribution policy, see "Dividends and Distributions."
In order for participants to purchase shares through the Program in any month,
the Administrator must receive from the participant any optional cash
investment not exceeding $5,000 by the OCI Payment Due Date and any optional
cash investment exceeding $5,000 by the Waiver Payment Due Date. The "DRIP
Investment Date" will be the date upon which Dividends will be reinvested in
additional Shares of the Trust, which will be on the Dividend payment date. The
"OCI Investment Date" will be the date, set in advance by the Trust, upon which
optional cash investments not exceeding $5,000 are first applied by DST to the
purchase of Shares. The "Waiver Investment Date" will be the date, set in
advance by the Trust, upon which optional cash investments exceeding $5,000,
which have been approved by the Trust, are first applied by the Administrator
to the purchase of Shares. Participants may obtain a schedule of upcoming OCI
Payment Due Dates, Waiver Payment Due Dates, and Investment Dates by referring
to the Summary Program Description or calling the Trust at 1 (800) 992-0180.
If the Market Price (the volume-weighted average sales price, per share, as
reported on the New York Stock Exchange Composite Transaction Tape as shown
daily on Bloomberg's AQR screen) plus estimated commissions for Shares of the
Trust is less than the net asset value on the Valuation Date (defined below),
DST will purchase Shares on the open market through a bank or securities broker
as provided herein. Open market purchases may be effected on any securities
exchange on which shares of the Trust trade or in the over-the-counter market.
If the Market Price, plus estimated commissions, exceeds the net asset value
before DST has completed its purchases, DST will use reasonable efforts to
cease purchasing Shares, and the Trust shall issue the remaining Shares. If the
Market Price, plus estimated commissions, is equal to or exceeds the net asset
value on the Valuation Date, the Trust will issue the Shares to be acquired by
the Program. The "Valuation Date" is a date preceding the DRIP Investment Date,
OCI Investment Date, and
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Waiver Investment Date on which it is determined, based on the Market Price and
net asset value of Shares of the Trust, whether DST will purchase Shares on the
open market or the Trust will issue the Shares for the Program. The Trust may,
without prior notice to participants, determine that it will not issue new
Shares for purchase pursuant to the Program, even when the Market Price plus
estimated commissions equals or exceeds net asset value, in which case DST will
purchase Shares on the open market.
With the exception of shares purchased in connection with optional cash
investments in excess of $5,000, shares issued by the Trust under the Program
will be issued commission free. Shares purchased for the Program directly from
the Trust in connection with the reinvestment of Dividends will be acquired on
the DRIP Investment Date at the greater of (i) net asset value at the close of
business on the Valuation Date or (ii) the average of the daily Market Price of
the Shares during the "DRIP Pricing Period," minus a discount of 5%. The "DRIP
Pricing Period" for a dividend reinvestment is the Valuation Date and the prior
Trading Day. A "Trading Day" means any day on which trades of the Shares of the
Trust are reported on the NYSE.
Except in the case of cash investments made pursuant to Requests for Waiver (as
discussed below), Shares purchased directly from the Trust pursuant to optional
cash investments will be acquired on the OCI Investment Date at the greater of
(i) net asset value at the close of business on the Valuation Date or (ii) the
average of the daily Market Price of the Shares during the OCI Pricing Period
minus a discount, determined at the sole discretion of the Trust and announced
in advance, ranging from 0% to 5%. The "OCI Pricing Period" for an OCI
Investment Date means the period beginning four Trading Days prior to the
Valuation Date through and including the Valuation Date. The discount for
optional cash investments is set by the Trust and may be changed or eliminated
by the Trust without prior notice to participants at any time. The discount for
optional cash investments is determined on the last business day of each month.
In all instances, however, the discount on Shares issued directly by the Trust
shall not exceed 5% of the market price, and Shares may not be issued at a
price less than net asset value without prior specific approval of shareholders
or of the Commission. Optional cash investments must be received by DST no
later than 4:00 p.m. Eastern time on the OCI Payment Due Date to be invested on
the relevant OCI Investment Date.
Optional cash investments in excess of $5,000 per month may be made only
pursuant to a Request for Waiver accepted in writing by the Trust. A Request
for Waiver must be received by the Trust no later than 4:00 p.m. Eastern time
on the Request for Waiver Deadline date. Good funds on all approved Requests
For Waiver must be received by DST not later than 4:00 P.M. Eastern time on the
Waiver Payment Due Date in order for such funds to be invested on the relevant
Waiver Investment Date.
It is solely within the Trust's discretion as to whether approval for any cash
investments in excess of $5,000 will be granted. In deciding whether to approve
a Request for Waiver, the Trust will consider relevant factors including, but
not limited to, whether the Program is then acquiring newly issued Shares
directly from the Trust or acquiring shares from third parties in the open
market, the Trust's need for additional funds, the attractiveness of obtaining
such additional funds through the sale of Shares as compared to other sources
of funds, the purchase price likely to apply to any sale of Shares under the
Program, the participant submitting the request, the extent and nature of such
participant's prior participation in the Program, the number of Shares held by
such participant and the aggregate amount of cash investments for which
Requests for Waiver have been submitted by all participants. If such requests
are submitted for any Waiver Investment Date for an aggregate amount in excess
of the amount the Trust is then willing to accept, the Trust may honor such
requests in order of receipt, pro rata or by any other method that the Trust
determines in its sole discretion to be appropriate.
Shares purchased directly from the Trust in connection with approved Requests
for Waiver will be acquired on the Waiver Investment Date at the greater of (i)
net asset value at the close of business on the Valuation Date, or (ii) the
average of the daily Market Price of the Shares for the Waiver Pricing Period
minus the pre-announced Waiver Discount (as defined below), if any, applicable
to such shares. The "Waiver Pricing Period" for a Waiver Investment Date means
the period beginning four Trading Days prior to the Valuation Date through and
including the Valuation Date. The Trust may establish a discount applicable to
cash investments exceeding $5,000 (the "Waiver Discount") on the last business
day of each month. The Waiver Discount, which may vary each month between 0%
and 5%, will be established in the Trust's sole discretion after a review of
current market conditions, the level of participation in the Program and
current
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and projected capital needs of the Trust. The Waiver Discount will apply only
to Shares purchased directly from the Trust. For information on a commission
that may apply in connection with an optional cash investment in excess of
$5,000, see "Distribution Arrangements."
The Trust may establish for each Waiver Pricing Period a minimum price
applicable to the purchase of newly issued Shares through Requests for Waiver,
which will be a stated dollar amount that the Market Price of the Shares for a
Trading Day of the Waiver Pricing Period must equal or exceed. In the event
that such minimum price is not satisfied for a Trading Day of the Waiver
Pricing Period, then such Trading Day and the trading prices for that day will
be excluded from (i) the Waiver Pricing Period and (ii) the determination of
the purchase price of the Shares for all cash investments made pursuant to
Requests for Waiver approved by the Trust. The minimum price shall apply only
to cash investments made pursuant to Requests for Waiver approved by the Trust
and not to the reinvestment of Dividends or optional cash investments that do
not exceed $5,000. No shares will be issued and funds submitted pursuant to
Requests for Waiver will be returned to the participant if the minimum price is
not obtained for at least three of the five Trading Days.
Participants will pay a pro rata share of brokerage commissions with respect to
DST's open market purchases in connection with the reinvestment of Dividends or
purchases made with optional cash investments.
From time to time, financial intermediaries, including brokers and dealers, and
other persons may wish to engage in positioning transactions in order to
benefit from the discount from market price of the Shares acquired under the
Program. Such transactions could cause fluctuations in the trading volume and
price of the Shares. The difference between the price such owners pay to the
Trust for Shares acquired under the Program, after deduction of the applicable
discount from the market price, and the price at which such Shares are resold,
may be deemed to constitute underwriting commissions received by such owners in
connection with such transactions.
Subject to the availability of Shares registered for issuance under the
Program, there is no total maximum number of Shares that can be issued pursuant
to the Program. As of the date hereof, 15,000,000 Shares have been registered
and are available for sale under the Program.
The Program is intended for the benefit of investors in the Trust and not for
persons or entities who accumulate accounts under the Program over which they
have control for the purpose of exceeding the $5,000 per month maximum without
seeking the advance approval of the Trust or who engage in transactions that
cause or are designed to cause aberrations in the price or trading volume of
the Shares. Notwithstanding anything in the Program to the contrary, the Trust
reserves the right to exclude from participation, at any time, (i) persons or
entities who attempt to circumvent the Program's standard $5,000 maximum by
accumulating accounts over which they have control or (ii) any other persons or
entities, as determined in the sole discretion of the Trust.
Currently, persons who are not Shareholders of the Trust may not participate in
the Program. The Board of Trustees of the Trust may elect to change this policy
at a future date, and permit non-Shareholders to participate in the Program.
Shareholders may request to receive their Dividends in cash at any time by
giving DST written notice or by contacting the Trust's Shareholder Services
Department at 1 (800) 992-0180. Shareholders may elect to close their account
at any time by giving DST written notice. When a participant closes their
account, the participant upon request will receive a certificate for full
Shares in the Account. Fractional Shares will be held and aggregated with other
Fractional Shares being liquidated by DST as agent of the Program and paid for
by check when actually sold.
The automatic reinvestment of Dividends does not affect the tax
characterization of the Dividends (i.e., capital gains and income are realized
even though cash is not received). If shares are issued pursuant to the
Program's dividend reinvestment provisions or cash purchase provisions at a
discount from market price, participants may have income equal to the discount.
Additional information about the Program may obtained from the Trust's
Shareholder Services Department at 1 (800) 992-0180.
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Privately Negotiated Transactions
The Shares may also be offered pursuant to privately negotiated transactions
between the Trust and specific investors. The terms of such privately
negotiated transactions will be subject to the discretion of the management of
the Trust. In determining whether to sell Shares pursuant to a privately
negotiated transaction, the Trust will consider relevant factors including, but
not limited to, the attractiveness of obtaining additional funds through the
sale of Shares, the purchase price to apply to any such sale of Shares and the
person seeking to purchase the Shares.
Shares issued by the Trust in connection with privately negotiated transactions
will be issued at the greater of (i) NAV per Share of the Trust's Shares or
(ii) at a discount ranging from 0% to 5% of the average of the daily market
price of the Trust's Shares at the close of business on the two business days
preceding the date upon which Shares are sold pursuant to the privately
negotiated transaction. The discount to apply to such privately negotiated
transactions will be determined by the Trust with regard to each specific
transaction. For information on a commission that may apply in connection with
privately negotiated transactions, see "Distribution Arrangements."
USE OF PROCEEDS
It is expected that the net proceeds of Shares issued pursuant to the Program
will be invested in Senior Loans and other securities consistent with the
Trust's investment objective and policies. Pending investment in Senior Loans,
the proceeds will be used to pay down the Trust's outstanding borrowings under
its credit facilities. See "Financial Highlights and Investment Performance -
Policy on Borrowing." As of February 28, 1998, $342,000,000 was outstanding. By
paying down the Trust's borrowings, it will be possible to invest the proceeds
consistent with the Trust's investment objectives and policies almost
immediately. As investment opportunities are identified, it is expected that
the Trust will redeploy its available credit to increase its investment
opportunities in additional Senior Loans.
DIVIDENDS AND DISTRIBUTIONS
Income dividends are declared and paid monthly. Income dividends may be
distributed in cash or reinvested in additional full and fractional shares
pursuant to the Trust's Shareholder Investment Program discussed above.
Shareholders receive statements on a periodic basis reflecting any
distributions credited or paid to their account. Income dividends consist of
interest accrued and amortization of fees earned less any amortization of
premiums paid and the estimated expenses of the Trust, including fees payable
to PAII. Income dividends are calculated monthly under guidelines approved by
the Trustees. Each dividend is payable to Shareholders of record at the time of
declaration. Accrued amounts of fees received, including facility fees, will be
taken in as income and passed on to Shareholders as part of dividend
distributions. Any fees or commissions paid to facilitate the sale of portfolio
Senior Loans in connection with quarterly tender offers or other portfolio
transactions may reduce the dividend yield. The Trust may make one or more
annual payments from any net realized capital gains, if any.
TAX MATTERS
The Trust intends to operate as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended. To do so, the Trust must meet
certain income, distribution and diversification requirements. In any fiscal
year in which the Trust so qualifies and distributes to Shareholders
substantially all of its net investment income and net capital gains, the Trust
itself is generally relieved of any federal income or excise tax.
All dividends and capital gains distributed to Shareholders are taxable whether
they are reinvested or received in cash, unless the Shareholder is exempt from
taxation or entitled to tax deferral. Dividends paid
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out of the Trust's investment company taxable income (including interest,
dividends, if any, and net short-term capital gains) will be taxable to
Shareholders as ordinary income. If a portion of the Trust's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the
Trust may be eligible for the corporate dividends-received deduction.
Distributions of net capital gains (the excess of net long-term capital gains
over net short-term capital losses), if any, designated as capital gain
dividends are taxable as long-term capital gains, regardless of how long a
Shareholder has held the Trust's Shares, and will generally be subject to a
minimum tax rate of 28% or 20%, depending upon the Trust's holding period for
the assets whose sale produces the gain. Early each year, Shareholders will be
notified as to the amount and federal tax status of all dividends and capital
gains paid during the prior year. Such dividends and capital gains may also be
subject to state or local taxes. Dividends declared in October, November, or
December with a record date in such month and paid during the following January
will be treated as having been paid by the Trust and received by Shareholders
on December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
If a Shareholder sells or otherwise disposes of his or her Shares of the Trust,
he or she may realize a capital gain or loss which will be long-term or
short-term, generally depending on the holding period for the Shares.
If a Shareholder has not furnished a certified correct taxpayer identification
number (generally a Social Security number) and has not certified that
withholding does not apply, or if the Internal Revenue Service has notified the
Trust that the taxpayer identification number listed on the account is
incorrect according to their records or that the Shareholder is subject to
backup withholding, federal law generally requires the Trust to withhold 31%
from any dividends and/or redemptions (including exchange redemptions). Amounts
withheld are applied to federal tax liability; a refund may be obtained from
the Service if withholding results in overpayment of taxes. Federal law also
requires the Trust to withhold 30% or the applicable tax treaty rate from
ordinary income dividends paid to certain nonresident alien and other non-U.S.
shareholder accounts.
This is a brief summary of some of the federal income tax laws that affect an
investment in the Trust. Please see the SAI and a tax adviser for further
information.
DISTRIBUTION ARRANGEMENTS
Pursuant to the terms of a Distribution Agreement, PASI will provide certain
soliciting services on behalf of the Trust in connection with certain privately
negotiated transactions and investments in excess of $5,000 pursuant to a
waiver. The Trust has agreed to pay PASI a commission in connection with the
sale of the Shares under the Distribution Agreement up to 1.00% of the gross
sales price of the Shares sold pursuant to requests for waiver, and up to 3.00%
of the gross sales price of the Shares sold pursuant to privately negotiated
transactions, payable from the proceeds of the sale of the Shares. PASI may
allow all or a portion of the fee to another broker-dealer. In any event, the
net proceeds received by the Trust in connection with the sale may not be less
than the greater of (i) the net asset value per Share or (ii) 94% of the
average daily market price over the relevant Pricing Period (as described in
"Plan of Distribution"). No commissions will be paid by the Trust or its
Shareholders in connection with the reinvestment of dividends and capital gains
distributions or in connection with optional cash investments up to the maximum
of $5,000 per month. PASI's principal business address is 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004. PASI and PAII, the Trust's
Investment Manager, are indirect, wholly-owned subsidiaries of PACC. See
"Investment Management and Other Services Investment Manager."
The Trust bears the expenses of issuing the Shares. These expenses include, but
are not limited to, the expense of preparation and printing of the Prospectus
and SAI, the expense of counsel and auditors, and others.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Trust
by Dechert Price & Rhoads, Washington, D.C., counsel to the Trust.
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EXPERTS
The financial statements and financial highlights contained in the Trust's
February 28, 1998 annual report to shareholders except for those periods ending
prior to February 29, 1996 have been incorporated by reference herein in
reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing. The address of KPMG Peat Marwick LLP is 725
South Figueroa Street, Los Angeles, California 90017-5491.
REGISTRATION STATEMENT
The Trust has filed with the Commission, Washington, D.C., a Registration
Statement under the Securities Act, relating to the Shares offered hereby. For
further information with respect to the Trust and its Common Shares, reference
is made to such Registration Statement and the exhibits filed with it.
SHAREHOLDER REPORTS
The Trust issues reports that include financial information to its shareholders
quarterly.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended February 28,
1998, are incorporated into the SAI by reference from the Trust's Annual Report
to Shareholders. The Trust will furnish without charge copies of its Annual
Report to Shareholders and any subsequent Quarterly or Semi-Annual Report to
Shareholders upon request to the Trust, 40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004, toll-free telephone 1(800) 992-0180.
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
Page
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Change of Name ............................................................ 2
Additional Information about Investments and Investment Techniques ........ 2
Investment Restrictions ................................................... 8
Trustees and Officers ..................................................... 9
Investment Management and Other Services .................................. 12
Portfolio Transactions .................................................... 14
Net Asset Value ........................................................... 15
Methods Available to Reduce Market Value Discount from NAV ................ 15
Tax Matters ............................................................... 17
Advertising and Performance Data .......................................... 20
Financial Statements ...................................................... 21
28
<PAGE>
15,000,000 Shares of
Beneficial Interest
PILGRIM AMERICA Pilgrim America
PRIME RATE TRUST Funds
New York Stock Exchange Symbol: PPR
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004
1-800-992-0180
No dealer, salesperson or any other Investment Manager
person has been authorized to give any Pilgrim America Investments,Inc.
information or to make any 40 North Central Avenue, Suite 1200
representations other than those Phoenix, Arizona 85004
contained in this Prospectus in
connection with the offer made by this
Prospectus and, if given or made, such
information or representations must
not be relied upon as having been Distributor
authorized by the Trust or the Pilgrim America Securities, Inc.
Investment Manager. This Prospectus 40 North Central Avenue, Suite 1200
does not constitute an offer to sell Phoenix, Arizona 85004
or the solicitation of any offer to
buy any security other than the Shares
offered by this Prospectus, nor does
it constitute an offer to sell or a
solicitation of any offer to buy the Administrator
Shares by anyone in any jurisdiction Pilgrim America Group, Inc.
in which such offer or solicitation is 40 North Central Avenue, Suite 1200
not authorized, or in which the person Phoenix, Arizona 85004
making such offer or solicitation is
not qualified to do so, or to any such
person to whom it is unlawful to make
such offer or solicitation. Neither
the delivery of this Prospectus nor Transfer Agent
any sale made hereunder shall, under DST Systems, Inc.
any circumstances, create any P.O. Box 419368
implication that information contained Kansas City, Missouri 64141-6368
herein is correct as of any time
subsequent to the date hereof.
However, if any material change occurs
while this Prospectus is required by
law to be delivered, this Prospectus
will be amended or supplemented
accordingly.
-------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Custodian
Prospectus Summary ............................ 1 Investors Fiduciary Trust Company
Trust Expenses ................................ 3 801 Pennsylvania
Financial Highlights and Investment Performance 5 Kansas City, Missouri 64105
Investment Objective and Policies ............. 12
General Information on Senior Loans ........... 14
Risk Factors and Special Considerations ....... 17 Legal Counsel
Description of the Trust ...................... 20 Dechert Price & Rhoads
Investment Management and Other Services ...... 21 1775 Eye Street, N.W.
Plan of Distribution .......................... 23 Washington, D.C. 20006
Use of Proceeds ............................... 26
Dividends and Distributions ................... 26
Tax Matters ................................... 26 Independent Auditors
Distribution Arrangements ..................... 27 KPMG Peat Marwick LLP
Legal Matters ................................. 27 725 South Figueroa Street
Experts ....................................... 28 Los Angeles, California 90017
Registration Statement ........................ 28
Shareholder reports ........................... 28
Financial Statements .......................... 28
Table of Contents of Statement of
Additional Information ...................... 28 PROSPECTUS
June 11, 1998
</TABLE>
